By Lynne Gowers on 10th June 2015

New report suggests self-employed could lose out from Universal Credit

Self-employed people could be set to lose out financially following the introduction of the new Universal Credit benefits system, according to a new report.

The Resolution Foundation thinktank has carried out a nine-month review of the planned welfare reform, which is aimed at low-income earners and is intended as a broad-based replacement for six currently separate benefits for working-age people.

According to the thinktank’s analysis, the simplification of the system could be advantageous in some ways, but these plus points are currently counterbalanced by an excessive bureaucratic burden that may financially harm many self-employed and freelance workers.

The key issue is that 800,000 self-employed workers moving onto Universal Credit will have to start reporting their income on a monthly basis, rather than annually through HM Revenue and Customs’ self-assessment system, creating substantial amounts of additional paperwork.

Moreover, since the benefit entitlement will be based on monthly earnings, the large variations in month-to-month takings that are common for those running their own business could reduce their entitlement, meaning they receive significantly less financial support than company employees earning the same annual amount.

For example, an employee in a couple with one child with a stable salary of around £12,000 a year, would earn £1,000 a month from employment, topped up with approximately £500 of in-work support, whereas a freelancer with the same annual income might see their entitlement cut by £90 one month if they earn an extra £200, whereas their benefit would rise by only £5 if they earn £200 less in another month.

The thinktank’s review has therefore called on the government to address these issues by bringing reporting requirements for the self-employed into line with their annual tax return and applying the minimum income threshold on an yearly, rather than a monthly, basis.

David Finch, senior economic analyst at the Resolution Foundation, said: “Almost a million self-employed workers moving on to Universal Credit will for the first time need to report their income every month. Many will receive less support than employees earning the same amount, just because what they take home varies from month to month.

“The treatment of the self-employed in Universal Credit is at odds with the government’s support for business and should be changed before workers start moving on to the new system.”

Written by Lynne Gowers
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