3Self-employment, entrepreneurship and self-reliance
22.Self-employment can be a very positive choice, allowing people to use entrepreneurial skills to grow businesses that add great value to society. The greater autonomy associated with self-employment can also have particular advantages for people for whom employee work may be less suitable: for example, people with health conditions, or with caring responsibilities. Entrepreneurship and self-reliance should be supported and encouraged wherever possible. The DWP has an important role to play in providing this support.
Specialist support and the New Enterprise Allowance
23.Self-employed people’s access to Universal Credit (UC) is subject to them being “gainfully self-employed”. To assess gainful self-employment, all self-employed would-be UC claimants have a “Gateway Interview” to establish that the work is regular, organised, developed and making a profit as the claimant’s main job. The interviews are carried out by Jobcentre Plus (JCP) Work Coaches who have mixed caseloads of many different categories of claimant. The DWP argued this generalist model allows Work Coaches to develop a broad range of skills and knowledge.18 We heard evidence, however, that assessing small business plans and activity for viability at the outset of a claim required specialist skills.19
24.Understanding whether an individual is gainfully self-employed requires specialist knowledge and understanding of business development that is beyond the remit of Work Coach training. This stage is vital in ensuring the Department supports potentially successful businesses while not squandering resources on those that have little chance of becoming sustainable. We recommend responsibility for conducting Gateway Interviews is transferred to New Enterprise Advisers, who are specialists in supporting the self-employed.
25.The New Enterprise Allowance was introduced in 2011 to offer specialist support to unemployed claimants who want to start their own business. It is delivered by external providers. Participants receive specialist mentoring, a weekly allowance, and access to business loans through a Start-Up Loan scheme. The Department has expanded the NEA since its introduction; while 1,820 people per month came through the programme in 2015–16, there will be capacity for 4,000 to 5,000 people per month in 2016–17.20 It has also extended the mentoring and advice that is on offer, including introducing a new stream offering support to self-employed people with established businesses who are low-paid.
26.Witnesses welcomed the expansion and reform of the NEA programme which will allow it to support a larger and broader cohort of self-employed people. We heard, however, that even the expanded programme will not satisfy demand for specialist self-employment support.21 JCP currently supports a caseload of 760,000 claimants who are looking for work. Only 7% of claimants will be able to access the NEA.
27.The expansion of the NEA is welcome. Nevertheless, Jobcentre Plus remains heavily focused on getting the unemployed into employee jobs. For many, this will be the right pathway. But the Department must ensure that there is adequate specialist support on offer to help those who could become gainfully self-employed fulfil their potential as self-reliant business owners. Even the expanded NEA can only cater for 7% of JCP’s caseload. This falls a long way short of the level of provision that we would expect to be allocated to supporting self-employment in a modern labour market.
28.The Department should commission research on the extent of unmet need for specialist self-employment support among the JCP caseload. This should consider both unemployed people and those who are currently in low-paid self-employment who might benefit from support in growing their businesses. If the Department can identify significant unmet need then it should expand the NEA, considering a separate specialist self-employment programme and payment structure for the long-term unemployed and for those who experience additional barriers to work, such as disabled people.
The Minimum Income Floor
29.Self-employed UC claimants are subject to a “Minimum Income Floor” (MIF). This assumes that they are making a certain, minimum amount of income each month. Their UC award is calculated on this basis, regardless of whether they have actually earned that amount. For most claimants the MIF is the equivalent of a full-time worker (35 hours) on National Living Wage. New self-employed claimants are exempt from the MIF for their first year of business, known as the “Start-up Period”. The MIF is intended to “encourage individuals to increase their earnings through developing their self-employment”, and to “[address] flaws in legacy benefits which allowed self-employed claimants to receive state support while declaring low or zero earnings”.22 It is structured in such a way as to incentivise claimants to earn as much as possible, and discourage under-reporting.
30.The Resolution Foundation, a think tank, expressed concern about the effects of the MIF on the relative treatment of employees and self-employed people in UC:23
Applying the MIF on a monthly basis could leave self-employed workers much worse off than employees, despite having identical annual incomes. This situation would arise as a result of a self-employed person’s UC award being capped by the MIF when their income is low, without then being recovered in months when they earn more.
We heard that this is a particular problem for self-employed people because their incomes are often volatile. This is not necessarily due to any fault on their part. The nature of self-employment means that income may be inevitably irregular: for example, reflecting large orders or payments received for ongoing work in one month, or as a result of seasonal variations.24 We also heard that the current Start-up Period of one year does not accurately reflect the length of time that it takes for a new business to become profitable.25 As a result, the MIF might harm potentially viable new businesses.
31.Witnesses suggested a number of ways that the MIF might be reformed to address these problems:26
- Extending the Start-up Period, or tapering the MIF up over a longer period than one year to avoid producing a cliff-edge at the end of year one;
- Applying the MIF on an annual or quarterly basis to help avoid penalising claimants with volatile incomes;
- Basing the MIF on turnover and evidence of future profit, rather than income; and
- Removing the MIF altogether. The requirements of claiming UC as a self-employed person may be sufficiently onerous to put off people who might view self-employment as an easy way of avoiding UC conditionality. This would imply that a key purpose of the MIF—discouraging unprofitable self-employment—is redundant.
32.We also heard that there is uncertainty about how individuals in the middle employment category of “workers” are treated within UC. Like employees, they are largely dependent on one organisation for work but many have very flexible contracts and, like many self-employed are vulnerable to volatility in incomes, whether as employees, or as self-employed. While this is an active area of case law we heard there is a need for clarity and guidance from the Department on how different groups should be treated in UC.27
33.There are three different categories of employment status in the UK. Universal Credit (UC) takes into account two, but focuses on one—employees. The self-employed are a large and growing component of the UK workforce. Taking urgent action to ensure that UC is appropriate to support them should be a priority for the incoming government.
34.The Department is seeking to support entrepreneurship without subsidising unprofitable self-employment. The existing Minimum Income Floor in UC does not get this balance right and risks stifling viable new businesses. The incoming government should commission an independent review of the MIF with a view to improving its sensitivity to the realities of self-employment. Until this is complete, the MIF should not apply to self-employed UC claimants.
Auto-enrolment
35.There are stark differences between the pension arrangements of self-employed people and employees. The self-employed are much less likely than employees to contribute to a personal pension at all and when they do so they tend to contribute less. Many of the reasons for differences in pension savings predate the rise of the gig economy, but may be exacerbated if low-paid, insecure work predominates:28
- Inertia and a lack of understanding of both private and state pensions may discourage self-employed people from setting up a pension scheme;
- The earnings levels of self-employed people, and their often volatile incomes, may make contributing to a pension unviable; and
- The self-employed may prioritise investing savings and capital in building their business over saving for retirement.
36.Automatic enrolment of employees into a workplace pension was introduced under the Pensions Act 2008 to address widespread under-saving for retirement. Auto-enrolment does not apply to self-employed people, although they may use the platforms that the Government and other providers have built for auto-enrolment.29 The Department stated that this is because in the case of self-employed people, the “employer” and “worker” are the same person. It “would not make sense to require a person to enrol themselves only then to opt-out if they don’t want to participate in pension saving”. The Department did, however, tell us it was considering the issue of self-employed pension savings in its independent review of auto-enrolment.30
37.Many witnesses told us that the Government should look to extend a form of auto-enrolment to the self-employed. We heard varying suggestions of models that might achieve this.31 We also heard differing opinions on whether enrolment in a pension should be compulsory for the self-employed. Some witnesses favoured “nudging” self-employed people towards contribution to a scheme, for example by requiring them to tick an “opt out” box on their tax returns if they did not want to contribute.32 Others felt compulsion was necessary to boost the numbers of self-employed saving for retirement to sustainable levels.33
38.Low levels of retirement saving amongst the self-employed risk storing up grave problems of potential hardship and reliance on the welfare state in later life. While auto-enrolment for employees has been a great success, current structures are not encouraging sufficient pension saving by the self-employed. The idea of using an opt-out system on tax returns to encourage greater contribution to pensions is an interesting one that merits further consideration.
19 The RSA and Crunch (SGE0062), Q305 (Matt Dooley), Q307 (Sam Windett), Social Market Foundation (SGE0026)
23 Resolution Foundation, Making the most of Universal Credit, June 2015, p.20. See also Q333 (Victoria Todd), Low Incomes Tax Reform Group (SGE0020), Joseph Rowntree Foundation (SGE0030)
25 Q336 (Benedict Dellot), IPSE (SGE0033), Joseph Rowntree Foundation (SGE0030), PeoplePlus (SGE0077 and SGE0019)
26 IPSE (SGE0033), The RSA and Crunch (SGE0062), Low Incomes Tax Reform Group (SGE0020), PeoplePlus (SGE0077 and SGE0019), Equity (SGE0036), ERSA (SGE0018), learndirect Ltd. (SGE0015), Advice NI (SGE0004), Joseph Rowntree Foundation (SGE0030), Social Market Foundation (SGE0026)
28 Association of Consulting Actuaries (SGE0022), Association of British Insurers (SGE0028), Smart Pension (SGE0014), Q292–293 (Michael Mealing)
29 Such as NEST, the National Employment Savings Trust
31 Q277 (Joe Lane), Q280 (Yvonne Braun), Q282 (David Fairs), Citizens Advice (SGE0039), Association of Consulting Actuaries (SGE0022), Association of British Insurers (SGE0028), Smart Pension (SGE0014), IPSE (SGE0033) Zurich (SGE0029), Freelancer Contractor Services Association (SGE0031)
29 April 2017