No Safety Net for Self-Employed when Tax Credits Cut

The self-employed form a dark corner of the UK economy into which the Conservative government chooses not to peer closely.

The impact of tax credit cuts on the self-employed is a matter on which ministers have largely remained silent.

At the latest count, between June and August 2015, 4.497 million people were self-employed and 26.427 million were employees.  One person was self-employed for every five to six employees.

All the rhetoric about coming increases in the minimum wage is irrelevant to the self-employed because they have to find their own wages. And it’s pretty likely that some employers will be encouraging employees to go off into self-employment, to lessen the impact on business profits of both auto-enrolment in workplace pensions (with compulsory employer contributions) and of the coming introduction of the ‘national living wage’.

If you are self-employed, the ‘national living wage’, starting in April 2016 at £7.20 for workers aged 25+, means nothing – and could even depress self-employment incomes if employers shed over-25s, increasing the numbers competing in the world of self-employment, which too often means casual shifts or short-term contracts.

The government includes the self-employed in its ‘jobs’ figures (creating a rosy image of plentiful job creation) but excludes them from workforce earnings figures (because they would depress those figures and prompt observers to ask how real the UK’s ‘economic revival’ really is).

The latest figures from HMRC for self-employment earnings are for 2012-13, and they show 897,000 cases of zero income, because the business made a loss, or its profits are offset by capital allowances or by losses suffered in previous years. Of the 5.76 million instances of self-employment – individuals in most cases – 1.99 million achieved annual income of less than £3,000, and the incomes of another 2.49 million were between £3,000 and £14,999.

At the other extreme, in 91,000 cases, annual income exceeded £100,000, and for this select group averaged £261,538.


The chart opposite shows clearly that the great majority of incomes from self-employment were very low in 2012-13, while a few, the 91,000, had earnings ranging from very comfortable to astronomical. The picture in 2015-16 is unlikely to be much different.

The self-employed are already poor relations in the world of welfare. No holiday pay, sick pay, statutory maternity or paternity pay, no entitlement to industrial injuries disablement benefit. No employer to make pension contributions on their behalf.

Many of the 4.497 million individuals who are nothing but self-employed — they do not also have a full-time or part-time job as an employee — have been able to survive only because of tax credits. The government’s argument that a higher personal tax allowance will help does not wash with those, probably over 3.5 million, whose total income is unlikely to reach the giddy heights of £11,000, the personal allowance from April 2016.

Some of the self-employed have pension incomes: nearly half a million are aged 65-plus, and most of these are likely to receive pension payments. That still leaves around four million self-employed individuals who are under 65 and in the main on very modest incomes. Yes, there will be under-reporting — cash-in-hand jobs, some illegal earnings — but the big picture is a dark one of an under-rewarded, reserve labour force for whom the national living wage will be a total irrelevance because they do not have an employer. Tax credits, on the other hand, are their lifeline.


More information

‘Self-employed workers in the UK 2014’, Office for National Statistics, August 20th 2014

‘Self employment income assessable to tax 2012-13’, Survey of Personal Incomes from HMRC, updated January 2015

‘Social security provision and the self-employed’, Social Security Advisory Committee, occasional paper no.13, September 2014

‘Summary of Labour Market Statistics’ table 3, full-time, part-time and temporary workers, October 14th 2015

Working tax credits are paid to working people aged 16-24 if they have a child or one of a range of disabilities, and to people in work who are aged 25-plus, whether they have children or not. Child tax credits are paid to parents, according to their income.

Upper thresholds for working tax credit are £14,000 for single people without children, £19,000 for couples without children, and £40,000 for families with children. The Daily Mirror has published a concise guide to the proposed tax credit cuts wanted by George Osborne, the Chancellor, but on which the House of Lords forced a rethink this week.








Earnings Up! What’s the Catch?

Earnings are rising faster than inflation, said the UK’s Coalition government triumphantly this week, a claim repeated by the BBC:

“Growth in average pay for UK workers overtook inflation for the first time in five years, according to data from the Office for National Statistics.

Wages excluding bonuses rose by 1.3% in the year to September, beating the 1.2% Consumer Prices Index inflation rate.

Including bonuses, earnings rose by 1% from a year earlier, the ONS said.

The ONS also said that UK unemployment in the July-to-September period was down 115,000 on the previous quarter, cutting the total to 1.96 million.

Pay has lagged inflation since the global financial crisis, but in recent months earnings have been rising just as the pace of price growth slows.”*

It sounds wonderful, but the reality is nowhere near as rosy.

Firstly, the Office for National Statistics (ONS) considers only the wages of full-time employees. Most adults in the UK are not full-time employees. The ONS’s survey-based figures for July to September 2014 suggest that there were 19.203 million full-time employees. At the same time, there were a total of 38.865 million men aged 16-64 and women aged 16-59 living in the UK. These are the age ranges still used to describe the population of ‘working age’, although women’s state pension age is already 62 and is rising to 65 by 2018. From October 2020 neither men nor women will be able to claim a state pension until they are 66, if current legislation persists.

Already, the figures for July to September show that 1.119 million over-65s were officially working.

The median earnings for 19.203 million full-time employees between July and September were £481 a week gross, equivalent to £25,012 a year. This was exactly the same as in the previous quarter, April to June. For full-time earners in the lowest 10%, their median wage was £250 a week, £13,000 a year, exactly the same as in the previous four quarters. A slight improvement was reported for full-time workers across the lowest 25% of earnings, up to £334 a week from £327, an increase of 2.1%, but £334 a week is equivalent to only £17,368 a year.

The self-employed are mysterious elephants rampaging about the room. Their numbers surged from 4.141 million in June 2013 to 4.523 million a year later, expansion of 9.2%. Their median earnings are not yet known because they have nearly ten months from the end of the tax year, April 5th, to submit earnings figures to Her Majesty’s Revenue and Customs, and in any case they are excluded from ONS’s earnings data.

The 4.523 million — almost one for every four full-time employees — include successful entrepreneurs, of course, but they also represent a surplus reserve, there to cover peak labour requirements without having to receive holiday pay, or sick pay, or any pay at all when they are not required.

Part-time employees are also a big part of the labour force, 6.824 million between July to September, one to every 2.8 full-timers. Not all want to be part-time, but they cannot find full-time work. Another 123,000 people are unpaid workers in family businesses, and a further 123,000 are on government employment and training schemes.

Far from reflecting rising prosperity, the earnings and employment data show a nation with many more people than well-paid jobs, a nation which is low-paid in relation to demands on incomes. Income tax has been eased for the lower paid, and mortgage rates for home-buyers remain low, but council tax and the costs of privatised utilities — electricity, gas, water, telecoms — squeeze disposable incomes hard. Add in the rents demanded of tenants, and childcare costs for working families with children, and travel costs for commuters on our privatised railways, and the picture is blacker still.

Privatisations have amplified income inequalities which show no sign of easing. and which dim the prospects of today’s generation of children.

*’Pay growth beats inflation as jobless total falls, ONS says’, BBC News business, November 11th 2014

Employment and wages data from the Office for National Statistics, the EARN and EMP data series, June to September 2014

Pat Dodd Racher

Zero Hours Contracts: Divisive and Exploitative

by Pat Dodd Racher

Zero-hours contracts bring short-term benefits to employers but remove income security from those workers unfortunate enough to have to sign them. Those workers are growing in number, heading rapidly towards 250,000 in the UK. By the fourth quarter of 2012, 200,000 employees had been hired on zero-hours contracts, meaning they have to be available for work when required but are not guaranteed any work, or income.

This regressive phenomenon reminds me of the plight of landless farm labourers after the appropriation of communal lands by rich individuals by means of the Enclosure Acts. Without land and dependent on irregular wages, country dwellers flocked to work in the factories of the Industrial Revolution.

A big difference now is that workers on zero-hours contracts do not have permanent, paid jobs to go to. Like unpaid interns, they are casualties of economic contraction. The 200,000 on zero-hours contracts in the latter months of 2012 were a quarter more than the 161,000 recorded a year earlier, and approaching three times more than the 75,000 reported in the final three months of 2005. An estimated 23% of employers with over 100 staff are making use of zero-hours contracts, according to a report in The Guardian* in April 2013.

Mark Mitchell, chief executive of recruitment firm Meridian Business Support, had a letter published in The Sunday Times business section on April 14th 2013, headlined ‘Zero hours give bosses vital flexibility’. Mr Mitchell said that “as long as both the worker and employer are content, the model is beyond reproach”.

He did accept some downsides, notably that jobseekers “hoping for regular income and work patterns do not always get them” but defended this in the interests of the flexible labour market.

This type of contract does give employers bucket-loads of flexibility, but workers do not know from week to week whether they will earn anything at all, and thus they cannot make financial plans and risk not being able to support themselves or their families unless they claim state welfare benefits.

Zero-hours contracts are being used as a loophole to escape the Agency Worker Regulations. These are European Union regulations which came into force in the UK in October 2011, and which require staff supplied by agencies to be given the same pay rates, hours, annual leave, breaks and rest periods as workers who are directly employed. All the time that zero-hours arrangements are legal, employers are likely to use them because they cut costs.

They probably don’t do much for staff loyalty, but employers do not seem bothered, probably believing that there is no shortage of new recruits.

Mr Mitchell believes that the numbers with zero-hours jobs will grow and grow, as employers respond to auto-enrolment into workplace pensions (being phased in between 2012 and 2018), and to real-time PAYE notification to Her Majesty’s Revenue and Customs (from April 2013), by cutting back on job contracts offering specified pay for specified hours, and replacing them with the obligation to be available for work, in return only for pay when the employer wants work done.

Employment on this uncertain basis is a step back towards a past we thought had been left behind, a past of serfdom and slavery, a past in which there is no social contract and in which workers are depersonalised units of cost.

The media, argued Mr Mitchell, “does not fully understand Britain’s economic reliance on the agility and dynamism of the labour market. Small businesses need flexibility to be able to grow”. It would not be so bad if the flexibility were shared, if banks said “repay your loan when you can”, if suppliers said “use our materials and pay us when you feel the time is right”, but it is only the workers who are being forced into ‘flexibility’.

In some respects zero-hours jobs are more exploitative, albeit less physically cruel, than some manifestations of slavery. Slave owners had to house and feed their slaves or they were not capable of working, but modern employers have no compulsion to ensure their workers have a roof over their heads and food in their homes. Is this the society we really want? Or is it the latest manifestation of the attitude that there is “no such thing as society”?

* ‘Big rise in firms hiring staff on zero-hours contracts’, by Phillip Inman, The Guardian, April 2nd 2013.

Flexing Back to Serfdom

What is it about employers and their demands for a flexible workforce? By ‘flexible’ they appear to mean sackable at will. This view of people as no more than units of production inspired Karl Marx and Friedrich Engels in the 19th century, and subsequent philosophies of communism. For a time, especially in Western Europe and North America post-1945, communism retreated into the archive of failed doctrines. Economic growth made workers into desirable assets, and their incomes rose. The capitalist system seemed to be delivering prosperity for all.

As we look back, we can link our exploitation of fossil energy, especially oil, with economic expansion, but like those supermarket bargains of the day, once it’s gone, it’s gone, and the outcome is economic contraction. Competition is fiercer, employers depersonalise their staff and treat them like widgets. It is a step back towards serfdom.

‘Renting to be ‘way of life’ for young UK families’, read a headline in The Observer on June 10th 2012, above a story by Toby Helm and Tegan Rogers. “Millions of young families are entering an era of insecurity in which renting becomes the nom, according to a report that warns of steep increases in the number of parents unable to buy their own homes”, they said, quoting a Cambridge University study.[1] Over the previous five years, the number of families with children having to rent private accommodation soared 86%, they said. Generally, they are renting because they cannot afford to buy. Many families “are paying half or more of their income in rent and, as a result, have little or nothing left at the end of the month to save for a deposit.”

The Cambridge University report would probably have been even gloomier if it had considered looming issues of resource scarcities, which intensify competition and push costs up and wages down and so are serious albeit underplayed policy priorities.

If your employer makes you redundant, and you cannot get another permanent full-time job, you are not likely to get a mortgage either. Work insecurity also means housing insecurity.

A good 40% of households in the UK do not have the resources to repay a mortgage, and for another   20% it is a dubious proposition. Home buyers are concentrated in the upper third of the income distribution. At the top of the scale, households are doing very nicely, better than at the start of the millennium, but their advance is at the expense of everyone else.

In 2010 the incomes of UK households looked like this:

From Family Spending, 2011 edition, Office for National Statistics, tables 3.2 and A6

The hardest-up 10% of households had average incomes under £8,320 in 2010, and average spending of £9,651 – quite a gap! Spending ran ahead of incomes in the four lowest income deciles, and was barely lagging income in the fifth decile. The most affluent 10% of households, in the top decile, were very comfortable in comparison. However, the picture is complicated by several categories of ‘spending’ that are excluded from the figures: life assurance, pension contributions, net income tax, national insurance, mortgages and outright purchase or alteration of dwellings, repayment of debt consolidation loans, savings and investments –categories of expenditure that are either compulsory, as with income tax and national insurance, or are voluntary payments made with the intention of making households more financially secure, and less dependent on the state, in future. Only the highest-income 30% of households seem to be in a relatively strong position to improve their financial resilience.

For more than two-thirds of households, pressures from their paymasters — whether government welfare, public-sector employers or employers in the private sector — to do more for less will further damage their ability to provide for their own futures. We don’t seem to be following a very secure path.

Shouldn’t we stop holding mammoth employers in awe, and deferring to them as our economic saviours? Their interest in us is purely financial. Instead, shouldn’t we put a lot more effort into not-for-profit and co-operative enterprises, in which worker members have a genuine stake? The futures of work, and of payment for work, are issues that government tries to treat as non-issues, as solely the responsibility of individuals, who can get good jobs if they try hard enough. If only that were true, but it’s not. Nowhere close.

[1] ‘Housing in Transition: understanding the dynamics of tenure change. A report for the Resolution Foundation and Shelter by Christine Whitehead, Peter Williams, Connie Tang and Chihiro Udagawa, Cambridge Centre for Housing and Planning Research, 2012