A “hidden” raid on the self-employed threatens to engulf the government’s Universal Credit reforms in further scandal, as hard-working traders see their incomes hit by hundreds of pounds a year.
Critics have lined up to slam changes to in-work benefits like tax credits, which are now impacting some of the 800,000 strivers who, according to an influential think tank, will eventually be required to move onto the new system.
As part of the move, little-known rules will hit sole traders, including window cleaners and hairdressers, to the tune of £1.5bn by 2022, figures from the Office for Budget Responsibility reveal, meaning it could cost some claimants as much as £1,500 a year.
The flagship welfare reform has already been plagued by problems, including a perilous six week stall in payments, a surge in the use of loan sharks and food banks, and rip-off fees to call its helpline.
Now a fresh scandal has emerged amid increasing disquiet from self-employed people claiming in-work benefits such as child and working tax relief through Universal Credit.
Stephen Lloyd, Lib Dem work and pensions spokesperson, told HuffPost UK: “As if there wasn’t enough wrong already with the shambles of Universal Credit, it now threatens to decimate Britain’s entrepreneurs.”
While Labour’s Seema Malhotra added: “Self employed workers who are doing the right thing are being hit.”
The Department for Work and Pensions did not initially respond to requests for comment, but later said Universal Credit helps people “improve their lives and raise their incomes”.
‘Inherently unfair’
The growing problem revolves around an aspect of Universal Credit dubbed the “minimum income floor”.
It requires the self-employed to prove they earn at least the National Living Wage consistently in order to receive entitlements in full each month.
The regulation has been described as “inherently unfair” as, through its design, it leaves some sole traders worse off than employees earning the same amount.
“Under the previous system, people were judged on their numbers of hours and the amount they earned on a sliding scale. The less you earned the more credit you received,” Benedict Dellot, Director of Economics at the RSA think tank, told HuffPost.
“But now with Universal Credit, there is a minimum earnings requirement. The problem is that this just doesn’t work out for those with fluctuating income.”
Unlike the previous tax credit system, Universal Credit is not calculated over a year but instead every month.
It means one good month of earnings could suddenly cut the amount of entitlements for the following four weeks.
But one bad month of earnings would not mean a proportionate increase in entitlements to help make up the shortfall.
Critics say monthly reporting means people with volatile earnings, such as those tied to seasonal work or who rely on Christmas trading, risk losing out.
Supporters say regular reporting introduces financial rigour into businesses.
Yet penalties for late submission of reports increase pressure too.
“If people report a week late, there’s a penalty,” Dellot said. “What happens if you’re on holiday?”
Other regulations state that budding business owners have just 12 months grace to try to achieve profits before the minimum income floor is introduced.
How a self-employed worker could lose out
A self-employed worker could in theory find themselves worse off compared to an employee with the same annual earnings and family characteristics.
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.
But a self-employed worker also earning £12,000 over the course of a year may take home a different amount from month-to-month. For instance, earning an extra £200 in a given month would reduce their entitlement by £90, while taking home £200 less in another month would increase their entitlement by just £5. This is because the minimum income floor restricts their entitlement in months where earnings are lower than a full-time worker on the minimum wage.
Source: Resolution Foundation
[Are you or someone you know self-employed and on Universal Credit? Contact our reporter with your experiences on George.Bowden@huffpost.com]
‘Out of the blue’
Entrepreneurs claiming tax credits in Universal Credit test areas say the rules have “come out of the blue”.
Toy shop owner Nicola Carr, from Morecambe, Lancs, said she was left demoralised by the changes, which have left her out of pocket and considering the future of her business.
“I have ploughed so much of my own money into stock and have reinvested all the takings. I was receiving working tax credits and child tax credit for my youngest daughter,” the 57-year-old told HuffPost.
“I was astounded to discover that the government assumes I’m in a position to pay myself £7.50 an hour for 35 hours a week 52 weeks of the year.
“It doesn’t matter if you make a loss and pay yourself nothing, the assumption is rigid.
“I have not yet heard what my new entitlement will be but as I was receiving tax credits of £150 a week, and they will apply earnings of [£1137.5] a month, I cannot see myself receiving very much at all.
“It’s just come out of the blue. I think this could affect a lot of people. It’s a scandal.”
The Resolution Foundation said the minimum income floor was the latest issue to become apparent with Universal Credit.
“This is one of many hidden technical issues with Universal Credit,” David Finch, Resolution’s Senior Analyst, told HuffPost.
“The six week wait is the first thing we’ve seen, the minimum income floor is the next. There are more of these issues and the more that Universal Credit gets rolled out the more these are going to become apparent.
“At its heart this is an issue of both complexity and also unfairness. It’s treating the self employed in a different way to employees even if they’re earning the same amount over a year.”
The think tank has called for the government to loosen the reporting requirements for self-employed people.
Lloyd, MP for Eastbourne, East Sussex, added: “Those who the take risk of starting a business and becoming self-employed play a crucial role in our economy. Our benefits system must help, not hinder them.
“Yet Universal Credit, by prematurely ripping away the support small businesses need in the early stages, will punish entrepreneurship. The roll-out must be paused until this is addressed.”
“Our benefits system must help, not hinder them”
- Lib Dem MP Stephen Lloyd
Malhortra, the former shadow chief treasury secretary who raised the problem during her general election campaign in Feltham and Heston, said: “Universal Credit is not fit for purpose and is pushing working people into poverty.
“Self employed workers who are doing the right thing are being hit by rules that simply don’t reflect how their incomes can fluctuate each month.
“This Government says it is on the side of working families but this is really about balancing the nation’s books on the backs of the poor.
“The government must respect the will of Parliament, pause the roll out of Universal Credit and sort out the errors in the system which are making people’s lives a misery.”
“This is really about balancing the nation’s books on the backs of the poor”
- Labour MP Seema Malhotra
The rules have been compared with the furore over proposed changes to National Insurance for self-employed workers earlier in the year.
In March, Chancellor Philip Hammond was forced into a climbdown after a Budget backlash over his pledge to bring self-employed contributions in line with employees.
‘Test and learn’
Work and Pensions Minister Damian Hinds has admitted the government has yet to publicly release data on self-employed claimants.
“We have not yet assessed the effects of roll-out but, as part of [Universal Credit’s] test and learn approach, work is planned to make data available on the number of self-employed claimants and the impact of the minimum income floor,” he said in response to a written parliamentary question on Thursday.
MPs have called for an independent review into the issue.
Record numbers of Brits are self-employed, with figures released this week revealing 4.86 million now work for themselves.
Some 18 percent of self-employed workers claimed tax credits last year, whereas around 10 percent of employees did so, according to the Resolution Foundation.
Universal Credit is due to be rolled out to a further 400,000 people by Christmas, on top of the 600,000 already on the new system.
As of September, 225,000 people on University Credit were in employment.
Prime Minister Theresa May was left bruised on Wednesday after a symbolic victory for Labour in a Commons vote calling for Universal Credit to be scrapped entirely.
It comes after the government confirmed it would scrap call charges of up to 55p per minute for claimants phoning its dedicated helpline.
A DWP spokesperson told HuffPost in a statement on Sunday: “Universal Credit lies at the heart of our commitment to help people improve their lives and raise their incomes. It simplifies a complicated system and provides additional, tailored support to help people move into work and stop claiming benefits altogether.”
[Are you or someone you know self-employed and on Universal Credit? Contact our reporter with your experiences on George.Bowden@huffpost.com]