Bright Blue, the independent think tank for liberal conservatism, has today launched a new report calling for a new welfare settlement to support the growing proportion of the UK workforce that is self-employed.

The report, entitled Standing alone? Self-employment for those on low income, provides a comprehensive overview of the characteristics of the UK’s growing proportion of the labour market who are self-employed. The report finds:

• Self-employed individuals (20%) in the UK are twice as likely to reside in a ‘low income’ household compared to employees (10%), where 'low income' refers to having an equivalised gross household income below 60% of median household income.
• Given that 4.62 million individuals are self-employed in the UK, this indicates that over 900,000 individuals are self-employed and in a low income household.
• Self-employed individuals in low income households work markedly more hours on average (38 hours per week) than employees in low income households (26 hours per week).
• Self-employed individuals on low income are overwhelmingly satisfied with their job (80%), and are more satisfied than employees on low incomes (74%).
• 75% of self-employed individuals in low income households say that their ambition for self-employment is being able to sustain a good     standard of living. By contrast, 13% say that it is to grow their business to be as large as possible

Commenting, author of Standing alone? and Senior Research Fellow of Bright Blue, David Kirkby, said:

“Self-employment is a major and growing part of Britain’s labour market and it is vital that policymakers ensure these individuals are effectively supported.

Self-employed people on low income should be the priority. Earnings from self-employment have fallen in recent years and the self-employed are now more likely to be on low income than employees.

Self-employed individuals on low income are often in a particularly precarious situation financially. They typically experience significant fluctuations in their income which can be difficult to manage. They receive only limited access to existing state welfare and have low savings rates. 

The Government should establish new personal welfare accounts for self-employed individuals which they would pay into, and draw down upon in times of need, such as unemployment or illness. This new ‘welfare settlement’ would boost the financial resilience of the self-employed and boost the control and personal responsibility they have for insuring themselves against times of hardship.”

Despite the general positivity, there are challenges with self-employment. Our polling of self-employed people in low income households shows the top three challenges are: income fluctuations (55%); lack of holiday pay (37%); and saving for a rainy day (36%).

To increase their individual and national prosperity, Bright Blue has devised original policies to boost the financial resilience and access to advice and training of self-employed individuals in low income households:

Recommendation one: Compulsory Contributory Top-up Accounts for the self-employed.

We propose that all people whose main employment is self-employment be required to pay a new class of National Insurance above a certain income threshold into a Contributory Top-up Account. These contributions would go into a high interest savings account. Drawing down from the account would be tax-free.

Beyond this compulsory rate, further voluntary contributions should be possible. For those in low income households, voluntary contributions should be encouraged through some match funding from the state.

Individuals could draw down from these accounts only in specific circumstances: when they or their partner become unemployed; fall ill; experience a period of low income; become eligible for Maternity Allowance; or when they retire – with the remaining balance available to spend as they wish.

On balance, while the self-employed are a ‘special case’ with regard to lower benefit eligibility, they are also a special case with regard to lower National Insurance Contributions compared to employees. When Class 2 National Insurance is abolished, employees will pay more National Insurance than the self-employed at every point on the income scale where any contributions are made at all. Though the self-employed will be required to pay more into the system than currently, these Contributory Top Up Accounts mean they are likely to get more financial support than employees during period of unemployment, low income or parental leave.

As part of our polling we asked respondents whether enabling all self-employed individuals to save a small proportion of their earnings in a personal welfare account would appeal to them. Sixty four percent of self-employed respondents, including 64% of those in low income households, said that this was appealing.

Recommendation two: Financial incentives for Local Enterprise Partnerships to provide effective local advice networks for the self-employed

We propose that Local Enterprise Partnerships (LEPs) should be financially incentivised to develop local advice networks for self-employed individuals and business owners within a given locality. Funding for LEPs should be, in part, dependent upon them proving in their funding applications that they are organising effective local advice networks for self-employed individuals, particularly those in low income households.

In our polling we asked about local advice networks for self-employed people. We found that developing local networks for self-employed individuals appealed to half (47%) of self-employed individuals in low income households.

Recommendation three: Guaranteeing self-employed representation on Local Enterprise Partnership (LEPs) boards

We propose that there should be a requirement for a certain proportion of LEP board members to be self-employed. This would help support the availability of advice and guidance for self-employed individuals offered by LEPs, and the establishment of local advice networks. The exact proportion of board members required to be self-employed should be determined following consultation, but it should be reflective of self-employment rates in the local economy.