Universal Credit: supporting self-employment Contents


1.The self-employed are a large, and growing, part of the UK’s workforce. 15% of the workforce—around 5 million people—is self-employed.1 Speaking on the Government’s industrial strategy in 2016, the Secretary of State for Business, Energy and Industrial Strategy, Greg Clark MP, outlined the vital role that self-employment and entrepreneurship play in Britain’s economy:

One of the greatest strengths of our country is that we are a nation of entrepreneurs […] The start-ups, the small and medium sized enterprises, the lynchpins of local economies across the land. Britain is home to big name global businesses, but just as important—more important for job creation—are the entrepreneurs building businesses far from the spotlight.2

Self-employment has played an important role in the UK’s current record employment levels, and high levels of self-employment are now a structural feature of the UK labour market.3 It is anticipated that once Universal Credit (UC) is fully rolled out in 2022, it will support around 700,000 self-employed claimants. This is based on current caseloads for the legacy benefits that UC will replace.4

2.UC aims to transform the benefit system and the labour market. Amongst the many changes it will bring in are those for self-employed claimants. The main changes are:

a)the introduction of a Minimum Income Floor (MIF), an assumed level of income used to calculate UC entitlements (see Box 1);

b)a “Start up Period” for newly self-employed claimants of one year, during which the MIF does not apply; and

c)an increased role for Jobcentre Plus in determining whether claimants are “gainfully self-employed” for UC purposes and supporting them during their first year in business.5 A claimant is gainfully self-employed if self-employment is their main employment and if it is “regular, organised, and carried on in expectation of profit”.6 Jobcentre Plus is introducing specially-trained self-employment specialist Work Coaches to better assess and support claimants.

Through these changes the Department for Work and Pensions (DWP/the Department) aims to improve incentives for self-employed claimants to increase their earnings. This is in line with UC’s wider goal of promoting progression in work.7 The Department also aims to reduce the extent to which the benefit system subsidises unprofitable or very low-income self-employment, and discourage self-employed claimants from under-reporting their earnings.8

Box 1: The Minimum Income Floor

The Minimum Income Floor is an assumed level of income that applies to self-employed UC claimants. It is based on what the Department would expect an employed person in similar circumstances to earn. For most claimants, the MIF is set at the equivalent of 35 hours per week at National Living Wage (£7.83 per hour for people aged 25 or over, as of April 2018): approximately £1,190 per month, minus a notional deduction for tax and National Insurance. Lower MIFs apply for people in some circumstances: for example, claimants with young children.

The claimant’s UC entitlement is calculated as if they have earned the MIF each month, regardless of whether they have actually earned that amount. This means that if they have earned less than the MIF their income will not be topped up accordingly by UC.

3.Our predecessor Committee took evidence on the MIF during its inquiry on Self-employment and the gig economy, which reported in May 2017.9 That inquiry concluded that the MIF, as currently set, did not achieve the right balance between supporting entrepreneurship and not subsidising unprofitable businesses. Instead, it risked “stifling viable new businesses”.10 The Committee recommended the Government suspend the introduction of the MIF, pending an independent review of its impact. The Department rejected this recommendation. In response to the Committee’s report, it stated that it continued to believe that the MIF was “necessary, set at the correct level, and should be applied after a reasonable duration”.11 Since then, the UC roll-out has accelerated. As this process continues, more claimants will be affected by the MIF. In light of ongoing concern about its impact, we decided to re-visit the MIF as part of our rolling Universal Credit inquiry. We aimed to understand and set out in greater detail its likely impact and the possibilities for reform.

How the self-employed respond to UC

4.The Department’s self-employment rules aim to support claimants to start up and maintain businesses, while also prompting them to consider whether self-employment is right for them in the longer-term. Self-employment works for some people but not for others. Neil Couling, DWP’s Director General of UC, explained that the self-employed account for one third of people experiencing in-work poverty. Self-employed tax credit claimants earn on average £3,000 less per year than their employee counterparts.12 Part of the purpose of the MIF is to prompt those claimants to explore whether they might be better off in an employee job.13

5.The Department also aims to ensure that benefit claimants who are self-employed have similar obligations to those who work as employees. Lord Freud, the minister responsible for UC from 2010 to 2016, told our predecessor Committee that a key aim of UC was to “balance up the position of the employed and the self-employed” within the benefit system. He explained that the MIF aimed to “address a loophole in the current system”. This enabled self-employed claimants to “report little or zero income, but still receive full financial support”—in contrast to unemployed and employed tax credit claimants. He told the Committee this was “neither desirable nor sustainable”.14

6.The Department told us it expected claimants who are affected by the MIF to respond in one of three ways. They may:15

a)seek an employee job instead of self-employment, or alongside self-employment. If self-employment ceases to be their “main” employment, they will no longer be subject to the MIF. They would, instead, be subject to conditionality;16

b)take action to increase their self-employed earnings so that they consistently exceed the MIF; or

c)choose to remain self-employed and receive lower rates of UC. For some very low earning claimants this option will not be available, as they may not be found gainfully self-employed.17 Those claimants will have to seek employment if they want to continue claiming UC.

7.Based on the current tax credit caseload, it is expected that 400,000 of the estimated 700,000 self-employed people that UC will support when fully rolled out will have average monthly earnings that are below the MIF.18 This will deliver a saving to the Department of over £1 billion a year compared to the legacy system. The OBR’s January 2018 welfare trends report shows that savings from self-employed claimants account for some of the largest projected savings from UC. It also notes, however, that these are “one of the most uncertain elements” of the UC forecast.19 This is because the imposition of the MIF is likely to prompt behavioural changes amongst claimants that are difficult to model. These could affect savings in either direction.20

8.Witnesses told us the Department should be alert to the risk of unintended consequences resulting from the way the MIF is applied.21 We heard, for example, concerns about its impact on employment. The Department’s research suggests that many self-employed people on UC are in circumstances that present barriers to working in employee jobs or increasing their earnings. For example, 45% of self-employed claimants with children need to work around childcare or other caring responsibilities, and 30% of have a long-term physical or mental health condition.22 Several self-employed people, and organisations supporting them, told us that the consequence of the MIF for them would not be increasing their income or taking an employee job (which they felt was unviable), but unemployment or a major shortfall in income.23 Nigel Keohane, Director of the Social Market Foundation, a think-tank that has carried out substantial work on low-paid self-employed, questioned whether this was a preferable outcome. He suggested that “it may well be better to have people in even very low remunerated self-employed work than unemployed”.24 We also heard substantial concerns about its impact on self-employed people with volatile income.25 We return to these in Chapter 2.

9.In light of uncertainty of the impact of the MIF, Citizens Advice recommended the Department commit to ongoing testing of its new rules. They explained this should aim to ensure the Department is striking the right balance between supporting claimants and protecting public funds.26 When pressed on the design and impact of the MIF in oral evidence, Alok Sharma MP, Minister for Employment (the Minister) told us that “the whole process in Universal Credit is about test and learn” (see Box 2). He said the Department would “see how it operates as more people come onto the system” and “reflect” on what it learns.27 The Government reiterated this commitment in the Government’s response to our predecessor Committee’s report.28

Box 2: Test and learn in Universal Credit

“Test and learn” is part of the “Agile” project management methodology that underpins UC. It should allow the Department to continuously learn during UC’s rollout and responsively make changes. Learning could be based on feedback from staff, claimants, and other stakeholders, and from research data gathered by the Department.29

10.The Department could not share with us any early data on how UC claimants are responding to the MIF. However, it intends to publish in Spring 2018 a small study of how 40 claimants are responding to the MIF. This study will be interview-based, and will not produce conclusions that are generalisable to the wider UC caseload. In the longer-term, the Department plans to undertake two types of quantitative evaluation:30

a)Multi-waved quantitative studies that will track the impact of UC on claimants’ work decisions. The Department explained that this would require a sample of around 5,000 claimants. To ensure the sample is robust and non-biased it claimed a caseload of 50,000 claimants would be needed. The Minister expected this to occur in around Summer 2018.

b)Tracking status changes using administrative data. This will examine whether claimants subject to the MIF have opted to remain on UC and whether they have changed their employment patterns. The Department expected this data to be “developed over 2018”.

Given the need for a substantial caseload of claimants, the Department does not expect to be able to produce any quantitative analysis at all of the effect of the MIF until “at least” Autumn 2019. It did, however, direct us towards its survey of self-employed Working Tax Credit claimants that helped inform its decision making on the MIF.31 This used a sample of 1,000 claimants—less than 1% of the current Working Tax Credit caseload.32 We also found multiple other examples of Departmental research carried out on much smaller samples that the Department has deemed necessary for the MIF.33

11.The Department’s ability to adapt Universal Credit for the large and growing self-employed workforce will be a key determinant of its success. But UC was not designed with the self-employed in mind, and the Department’s new rules are uncharted territory. Their impact is highly uncertain. They could affect the cost of Universal Credit substantially—in either direction. They are, therefore, an ideal opportunity to make use of the “test and learn” philosophy underpinning Universal Credit. It is remarkable that the Department has no plans to produce any analysis of the effects of the changes (bar a tiny qualitative study) until at least late 2019. If they do not test, then they cannot hope to learn. We recommend the Department commission and publish ongoing evaluation of the effect of the new self-employment rules on Universal Credit claimants. In light of its previous research the first such evaluation should be commissioned when there are sufficient claimant numbers to permit a sample of around 1,000. This research should examine how claimants are responding to the Minimum Income Floor, including whether claimants who have opted to close their business have been successful in finding other work.

1 Office for National Statistics, Trends in self-employment in the UK, February 2018

2 Department for Business, Energy and Industrial Strategy, Speech: The importance of industrial strategy, September 2016

4 Office for Budget Responsibility, Welfare trends report, January 2018, p.10

5 Currently, access to Working Tax Credits for the self-employed is determined by HMRC.

6 See Box 5, p.25 for further detail.

9 Work and Pensions Committee, Self-employment and the gig economy, Thirteenth report of session 2016–17, HC847, May 2017

10 Work and Pensions Committee, Self-employment and the gig economy, p.17

11 Work and Pensions Committee, Self-employment and the gig economy: Government Response to the Committee’s Thirteenth report of session 2016–17, Second special report of session 2017–19, HC 644, December 2017

12 Q343 (Neil Couling)

13 Q343 (Neil Couling), DWP (UCR 0186)

14 Q283 (Lord Freud)

15 DWP (UCR 0186), Q363 (Neil Couling)

16 Claimants who claiming UC because they are unemployed, or who are working for less than their Claimant Commitment sets out is necessary, are required to search for further work or increase their earnings.

17 See Box 5, chapter 2.

19 Ibid., p.151

20 Ibid, p.95

21 IPSE (UCR 0174), Low Incomes Tax Reform Group (UCR 0196), Q251–254 (Sally Beadle, Luke Johnston, Andrew Kozman, Richard Betton), Q272–273 (Mark Hooper)

23 IPSE (UCR 0174), Low Incomes Tax Reform Group (UCR 0196), Q251–254 (Sally Beadle), Q272–273 (Mark Hooper)

24 Q331 (Nigel Keohane)

25 IPSE (UCR 0174), Low Incomes Tax Reform Group (UCR 0196), Child Poverty Action Group (UCR 0202), Citizens Advice (UCR 0201), National Farmers Union (UCR 0199), Gingerbread (UCR 0198)

26 Citizens Advice (UCR 0201)

27 Q352 (Alok Sharma)

Published: 10 May 2018