Friday 31 March 2017

It’s UC and the MIF, not NICs, we should be focusing on!

Since the 2008 financial crisis, self-employment as a sector of the British labour market has increased sharply, and accounts for nearly one third of the growth in employment figures since 2010. The rate of self-employment now stands at approximately 15% of the labour force, in other words about 4.64 million individuals (BoE, 2015; ONS 2016). Self-employment has “outstripped growth in permanent employment by 3 to 1 in the last decade” (O’Leary, 2015: 9) and has “accounted for nearly half of the increase in total employment since the recession” (Deane, 2016: 7).

It is some of this group (those earning more than £16,250 pa) that were most concerned by the changes in National Insurance Contributions (NICs) for the self-employed announced by the Chancellor Phillip Hammond in the 2017 Budget in the House of Commons on 8th March 2017.

As a relatively small change in the Budget, the Chancellor announced that Class 4 NICs for the self-employed would rise from 9% to 10% in April 2018 – and then to 11% in April 2019 – on income up to the higher rate threshold of £45,000 pa. The new rates are still lower than for employees who pay NICs at 12% on the same income levels, while both groups will continue to pay at 2% on income above the higher rate threshold.

This caused a great deal of furore in various circles, both in The Guardian and The Telegraph amongst others, and not a little traffic on my Twitter timeline with a range of people arguing for this change as well as against. What didn’t make it through the knee-jerk reactions was that only those of the self-employed earning in excess of £30,000pa would be worse off – so whilst no one likes paying more, it was in its own way progressive.

However, not only did this change to NICs fall foul of the 2015 Conservative Party election manifesto’s commitment to a 5 year lock against income tax and NI rises, but combined with the scrutiny that the Chancellor’s decision was put under, and coupled with the political capital that is being used by the Prime Minister to push through the unnecessary and damaging hard Brexit, saw the decision reversed in a matter of days.

I’d suggest that the focus of the (social) media-led outrage was misplaced. The real culprit affecting self-employed persons on low incomes is Universal Credit (UC), and specifically the Minimum Income Floor (MIF):

The most pertinent element of UC and self-employment in relation to vulnerability is the MIF, which applies to those who make a claim for UC and who have been self-employed for a minimum of twelve months. As the DWP (2016) makes clear, the “MIF is an assumed level of earnings”, based on an expectation of what a similarly gainfully employed person might be expected to earn. An individual’s MIF is calculated on the basis of:

Age applicable national minimum wage rate per hour x expected hours per week x 52 weeks = annual gross income, divided by 12 = gross monthly income

For the self-employed to claim Universal Credit, earnings must be declared to the DWP on a month by month basis, and if an individual’s earnings exceed their set MIF, self-employed claimants will receive less UC. However, if they earn less than their MIF, they will receive no increase in their UC, and in addition the MIF is only reviewed on an annual basis. Those who are self-employed are liable to earn less than employees and their income is likely to fluctuate throughout the year. In evidence given to the Work and Pensions Committee on 22/01/17, both Victoria Todd from the Low Income Tax Group and Benedict Dellot from the RSA suggested that a relatively low paid self-employed individual claiming Universal Credit will be worse off than an employee earning the same amount.

Clearly Universal Credit and the MIF disadvantages those who are self-employed, and this further increases their economic vulnerability as a result of a potentially fluctuating income and a social protection system that clearly fails to take account of this.

So although it is a clear truism that no one likes the idea of increased NICs, the real problem for the self-employed is Universal Credit and the Minimum Income Floor. It is this which the public, press and politicians should be aiming their ire towards. It is this which increases the likelihood of in-work poverty for those who, we are told, are a clear sign of success for the UK economy and are in part a driver of recovery both from the 2008 crisis and the inevitable fallout from Theresa May’s decision to pursue an ultra-hard Brexit… but that is a topic for another blog on another day.

Kevin Caraher – follow me on Twitter

Sources:

Bank Of England (2015) Self-employment: what can we learn from recent developments?, Quarterly Bulletin 2015 Q1, http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2015/q105.pdf



O’Leary, D. (2014) ‘Going it alone’, http://www.demos.co.uk/files/DEMOS_GoingitAlone_web.pdf?1409503024

ONS (2016). UK Labour Market: April 2016: Estimates of employment, unemployment, economic inactivity and other employment related statistics for the UK, https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/uklabourmarket/april2016#employment