Written evidence from the Department for Work and Pensions (SGE0038)

Summary

The Government recognises the importance of self-employment and small businesses to the economy and to society. As part of its wider growth strategy, the Government is keen to help self-employed people to achieve their potential and progress in work. Universal Credit is transforming lives, supporting people to enter work and earn more. That may be as an employee, self-employed, or a combination of both.

The legacy system of benefits and tax credits was successful in supporting people into self-employment, but did little to help them progress once they became self-employed. In some cases this led to the establishment of unprofitable or low-earning businesses with little prospect of providing people with a sustainable route towards financial independence - trapping families in poverty, exclusion and welfare dependency.

The Government wants people to be self-employed when it is the right thing for them to do to become financially self-sufficient. Universal Credit is designed to support claimants to progress their earnings to a level of financial self-sufficiency.

Where a claimant’s main economic activity is their self-employment and they are gainfully self-employed, they will be exempt from job search to allow them the freedom to run and grow their business. Their Universal Credit award is based on an assumed level of earnings equivalent to National Minimum Wage or National Living Wage multiplied by the number of hours they can reasonably be expected to look for work or be looking for work. This Minimum Income Floor is designed to encourage claimants to progress their earnings through developing their self-employment.

The Department is enhancing its support offer for the self-employed. New Enterprise Allowance will continue to provide people with a new business idea with support to get their business up and running, with a greater focus than ever before on ensuring self-employment enables people to become financially self-sufficient. From April 2017, a new element of New Enterprise Allowance will be available to low-earning self-employed claimants to support them to grow their earnings.   

To allow Universal Credit claimants time to develop their new businesses, a Start-up period of up to one year is available to newly self-employed claimants during which they receive regular support from a dedicated Jobcentre Plus Work Coach.

The Department welcomes the Select Committee’s focus on pensions and the self-employed as part of this inquiry. The Department is committed to helping people achieve financial security in later life and is reforming the pension system as part of its efforts to encourage a culture of saving. The Minster for Pensions announced a review of automatic enrolment on 12 December 2016 and the Department expects to explore the questions asked by the Select Committee as part of this review.

Universal Credit

Overview

1. Universal Credit (UC) is revolutionising the welfare system by making work pay for both employed and self-employed people. It is already transforming lives, with those on UC moving into work significantly faster and working longer than under the old system. For the first time the Government is not only helping people into work, but has the opportunity to help people while they are at work with personalised support.              

Support to find and progress in work

2. The core objective of UC is to support claimants to enter work, earn more or prepare for work in the future. The Department’s labour market offer focuses: on activation and movement into work, to keep people close to the labour market and move them back into work as quickly as possible; retention and prevention, to ensure people remain in employment; and progression in work, to ensure that people increase their earnings and ultimately become independent from the state.

3. Claimants are required to agree a claimant commitment, which sets out all the work-related requirements that must be met, explains the consequences of non-compliance and is updated as required.

4. The Department has a comprehensive strategy to develop its evidence including a large-scale Randomised Control Trial (RCT) which will tell the Department what works best in supporting people to progress in work, and enable development of a package of support to underpin the structural changes made through welfare reform. In the RCT, individuals will discuss with their Work Coach a range of ways they could increase their earnings, including seeking more hours or job progression with their current employer, up-skilling, seeking work with a different employer, or supplementing an existing role with employment elsewhere.

Self-employed

5. Self-employed claimants who are in a group expected to look for work while in receipt of UC, are interviewed by a Work Coach to determine if they are gainfully self-employed. This means that self-employment is their main employment, their earnings are self-employed earnings, and the work is organised, developed, regular and carried out in expectation of profit.

6. As part of this, the Work Coach looks at the relationship between the claimant and their clients. For example, was tax deducted at source; is the work supervised; can the claimant employ a substitute to cover holidays or sickness?

7. And claimants are required to provide a range of evidence, such as previous tax returns and business accounts details. Guidance is available for claimants and Work Coaches.

8. If the claimant is gainfully self-employed, they are exempt from work search and work availability requirements so they can focus on their business. Those already self-employed for over a year are subject to the Minimum Income Floor (MIF), an assumed level of income, created to encourage individuals to increase their earnings through developing their self-employment.

9. Gainfully self-employed claimants within one year of starting out in self-employment, taking active steps to increase their earnings, are eligible for a Start-up period of one year during which the MIF is not applied and they are not required to look for or take up alternative employment. Claimants are allowed a new Start-up period for a new business every five years.

10. Where a claimant is not gainfully self-employed, the MIF is not applied. They are required to meet work-search conditions and report any self-employed earnings. They receive support from a Work Coach with their job search. Their jobseeker’s claimant commitment, including the expected hours of work-search, may be adapted to take account of their self-employment activity where appropriate.

How Universal Credit adapts to variable incomes

Overview

11. The amount of UC awarded depends on the level of income and other family circumstances, and can include amounts for housing support, children and childcare. It is payable in and out of work so the need to claim different benefits when working 16 hours or more disappears. This is particularly helpful to claimants whose hours of work fluctuate.

Employees

12. For most employees, the UC system receives information about an employed claimant’s earnings directly from HM Revenue and Customs’ Real Time Information system, where employers upload salary information as it happens, ensuring the Department always has the most up-to-date earnings information.

13. Departmental systems perform a calculation at the end of a claimant’s monthly UC assessment period taking into account earnings information from the Real Time Information system.

14. If a claimant is eligible for a Work Allowance (if they are responsible for children and/or have limited capability for work), this amount is disregarded from their reported earnings. 

15. For earnings over the Work Allowance, if applicable, a taper is applied to the net amount of 65 per cent, meaning that the claimant keeps 35p of every additional £1 earned.

16. From April 2017 the taper rate will reduce to 63 per cent, as announced in the Chancellor’s 2016 Autumn Statement.  Claimants will keep more of their earnings, benefitting 3 million households.[i] 

Self-employed claimants

17. Claimants with self-employed earnings are required to self-report these at the end of each monthly assessment period. This is currently done by telephoning a UC call centre. Longer-term the Department intends to introduce on-line reporting.

18. Self-employed earnings are reported on a simplified cash basis, closely aligned with HMRC’s simplified cash accounting system, with claimants reporting the total receipts into the business and the details of payments out of the business under defined categories in the assessment period.

19. As for employees, monthly reporting allows UC to be adjusted on a monthly basis, ensuring claimants whose income from self-employment falls do not have to wait several months for their UC to be re-assessed. Unlike for employees, the application of the MIF may mean that falls in actual earnings are not always reflected in a higher payment of UC.

20. Currently, all earnings received are taken into account for that assessment period, for both employed and self-employed claimants. The Government is aware that some claimants experience extreme fluctuations in earnings from month to month. So, from April 2018 in UC Full Service only, surplus earnings above a prescribed level from either employment or self-employment, or self-employed losses, will be carried forward into subsequent assessment periods and used to adjust the level of earnings taken into account in the calculation of the UC award.

The effect of Minimum Income Floor

21. The MIF was created to encourage individuals to increase their earnings through developing their self-employment and addresses flaws in legacy benefits which allowed self-employed claimants to receive State support while declaring low or zero earnings. This encouraged, in some instances, the continuance of unprofitable and unproductive businesses, unintentionally propped-up by the welfare system, with little prospect of providing a sustainable route towards financial independence, trapping families in poverty, exclusion and welfare dependency.

22. Under UC, where a claimant consistently fails to grow their earnings, the Department expects the MIF to lead them to consider whether they should persist in unprofitable self-employment, or pursue work as an employee.

23. The MIF also mitigates against fraudulent or erroneous under-reporting of earnings.

24. The MIF is determined by multiplying the hours the claimant can reasonably be expected to work or be looking for work by the relevant National Minimum Wage or National Living Wage for their age, minus notional income tax and National Insurance contributions.

25. A claimant’s expected hours of work depends on their circumstances. For someone with no limitations on their expected hours of work, this is 35 hours per week. Where a person has limitations on the hours they can reasonably be expected to work, this is reduced. For example, for a gainfully self-employed responsible carer of a child under 13, their availability may be restricted to their child’s normal school hours and the MIF level reduced as a result.

26. Claimants who are moved by the Department from legacy benefits to UC, whose circumstances otherwise remain the same, will not have a MIF applied until after six months giving further time to develop their business before a MIF is applied.

National Living Wage

27. Claimants aged 25 and over have their Minimum Income Floor level set by reference to the National Living Wage producing a higher level of assumed earnings than for claimants in the younger National Minimum Wage age bands. This level of challenge will grow as the National Living Wage increases over time. However, the Government believes it remains correct to continue to link the MIF with National Minimum Wage and National Living Wage levels, to best reflect the levels that claimants should be seeking to earn from self-employment while receiving Universal Credit, and which they could expect to earn from working similar hours as an employee.

How variable incomes affect other benefits.

Tax credits

28. Tax credits are an annual, flexible system of financial support, tailored to a household’s specific circumstances with payments based on the taxable income. There are two types of tax credit: Child Tax Credit and Working Tax Credit. Child Tax Credit provides support for households with children whether or not the claimants are working. Working Tax Credits provides support for low-income households in work, with or without children.

29. To begin with, HM Revenue and Customs initially pays out a tax credits award based on the claimant’s household income in the previous tax year.

30. The award will only change if income for the current year increases or decreases by more than the income disregards, currently £2,500. The aim is to give stability to a claimant’s award by providing a ‘buffer zone’ in which a family’s income can increase or decrease without affecting their tax credits entitlement.

31. Where income does change by more than the disregards above, and the claimant earns more than the income threshold, their award will be tapered to reflect their additional income. The taper rate is 41p for every additional £1 of income. The taper ensures that there is always an incentive to increase earnings, for example by working for more hours. The income threshold for Working Tax Credit is currently £6,420 and for Child Tax Credit only it is £16,105.

32. Where a tax credit claimant’s income for the year is going to change significantly, HM Revenue and Customs asks them to contact them during the year, to make sure HM Revenue and Customs take that into account in their on-going award. This reduces the chances of them being underpaid or overpaid, and having to pay money back.

33. In any event, as part of the renewals process each year, HM Revenue and Customs asks customers to confirm their actual income for the tax year just ended. If HM Revenue and Customs has paid too little, it will make an additional lump-sum payment. If it has paid too much, it will usually recover this from future payments. At this stage HM Revenue and Customs also uses the finalised income figure to determine initial payments for the following year. Nonetheless, where income fluctuates greatly from one year to the next, or where circumstances change significantly, overpayments can arise. Mostly this is where claimants have not told HM Revenue and Customs about a change of circumstances, but it can happen even where HM Revenue and Customs and the claimant both do everything they are required to do. HM Revenue and Customs will look to recover the whole of an over-payment, the HM Revenue and Customs will not deduct more than a specified percentage from ongoing regular payments. If paying back tax credits will cause financial difficulties, claimants can ask HM Revenue and Customs to look again at their payments. Claimants can provide HM Revenue and Customs with information about their income and living costs and the rate of recovery of the overpayment from the ongoing award can be adjusted if appropriate.

34. To qualify for Working Tax Credit, a claimant must normally be working at least a particular number of hours a week. Claimants with varying hours are asked to say how many hours they usually work. If their normal working hours fall below the requirement, they will not be entitled to Working Tax Credit, but may be able to claim other benefits. This does not affect entitlement to Child Tax Credit.

Housing Benefit

35. The long-established rules concerning the calculation of earnings are intended to be fair, easy to understand and straightforward to administer, whilst ensuring similarity of treatment between people in similar circumstances. Local authorities have to arrive at a weekly estimate of how much the Housing Benefit claimant earns.

36. In most cases, determining how much a person earns in a week is a straightforward matter, but where work fluctuates or where there is a recognisable cycle of work, the rules allow for earnings to be averaged. The average may be calculated over the period of a recognised cycle of work, where one has been established. If there is no recognisable cycle, earnings are averaged over the five weeks immediately preceding the claim, or any other period if that would give a more accurate picture of a person’s pattern of work. Therefore, local authority decision makers have to decide the period over which earnings are to be assessed to provide a representative estimate of the normal average weekly earnings. It is for the decision maker to decide what period to use having regard to the facts and circumstances of each individual case.

Effect of income on other benefits

37. To be eligible for Statutory Maternity Pay, a woman must have been employed continuously by the same employer for 26 weeks into the qualifying week, which is the 15th week before the week she expects her baby. She must also have earnings on average at least equal to the Lower Earnings Limit for National Insurance purposes.
38. Maternity Allowance is intended for those who cannot get Statutory Maternity Pay. This is predominantly the low paid and the self-employed. A woman must have been employed and/or self-employed in at least 26 of the 66 weeks before the week she expects her baby and earn on average at least £30 a week.
39. Since 1 April 2014, pregnant women with an expected date of childbirth on or after 27 July 2014 who are neither employed nor self-employed may access a lower payment of Maternity Allowance. To qualify they must regularly take part in tasks or activities related to the business of their self-employed spouse or civil partner.
40. Statutory Sick Pay provides a measure of earnings replacement for employees unable to work because of short-term sickness. Employers are legally obliged to pay all employees who satisfy the qualifying conditions for payment. The scheme is administered and paid for by employers, who have a statutory liability to pay Statutory Sick Pay for up to a maximum of 28 weeks.
41. Those with variable earnings and who may not be entitled to Statutory Maternity Pay can be entitled to Maternity Allowance. Those who are not entitled to or Statutory Sick Pay paid may be entitled to Employment and Support Allowance. In both cases claimants must satisfy the qualifying criteria.

42. Statutory Maternity Pay, Statutory Sick Pay and Maternity Allowance are taken into account when considering entitlement to means-tested benefit. A woman is disqualified from receiving Statutory Sick Pay during her Maternity Pay Period or Maternity Allowance Period

43. This period is specifically set aside for a woman to receive a maternity payment primarily to protect her health at the end of her pregnancy and in the months after childbirth, as it is considered that a maternity payment is more appropriate for these months. Statutory Sick Pay and Statutory Maternity Pay are two separate payments, each with a specific purpose and do not represent a duplication of benefits. Pregnancy is not an illness and it would be inappropriate to pay Statutory Sick Pay for this.

Labour market participation

44. The Government remains committed to achieving full employment in the UK and to report progress towards this annually.  The Government has committed to publish the report within a year of section 1 of the Welfare Reform & Work Act commencing. This means the first report must be presented to Parliament before 16th May 2017.

45. Self-employment may be appropriate for those who need to fit their working hours and patterns to suit caring responsibilities, manage their health condition or disability.  Ratios of employees and self-employed working part time are broadly similar - 26.2 per cent of those employed, and 29 per cent of self-employed worked part time (at September 2016).[ii]

46. Older people who are in work are more likely to work part-time or flexibly, or be self-employed. This is especially true of people in work after attaining State Pension age. There is also a high level of unmet demand for flexible working and reduced hours in employment amongst older people. An increasing number of older people in work will mean there is increased demand for flexible working opportunities.

47. Evidence from Carers UK’s State of Caring survey shows a slightly higher than average rate of self-employment amongst carers.  Over the last 10 years, the proportion of individuals self-employed that are women has increased from 26 per cent in 2006 to 31 per cent in 2016.  Overall, the numbers of men aged 50-64 in self-employment (1.1 million) is more than double the number of women (0.5 million).

48. There are significant potential benefits for start-ups by over-50s which could capitalise on the business opportunities arising from demographic change and older population, if given the right support.  Older entrepreneurs tend to be more successful in terms of start-up survival rates: 70 per cent of start-ups founded by older workers were found to last longer than three years, in contrast to only 28 per cent created by younger entrepreneurs.[iii]

49. Older workers may find it easier to set up as self-employed after gaining experience and skills working for someone else and establishing a network of contacts. It may be easier for some older workers to gain access to the initial start-up costs associated with some self-employed jobs, for example through having greater financial security. The Government intends to publish a new, employer-led national strategy later this year setting out the future direction of the Fuller Working Lives agenda.

50. The Department for Work and Pensions and the Department of Health jointly published the Green Paper “Improving Lives: Work, Health and Disability” on 31st October 2016. This sets out proposals for a new Personal Support Package, including new initiatives designed to tailor support for claimants with health conditions or disabilities.  Once consultation on this Green Paper is completed (17th February 2017) the Department will have a better understanding of what will work to further develop plans and implement suitable methods to help people towards and into work, and how these might relate to being self-employed.

51. UC is designed to have the flexibility to support carers and people with health conditions or disabilities to take-up self-employment where this is an effective route for them to remain in the Labour Market. Where there is no work expectation of a claimant (for example, because they have limited capability for work due to a health condition), UC allows them to continue that self-employment, applying the taper to ensure they are better-off working. Where a work expectation exists, the expectation may be reduced to allow for caring responsibilities. From April 2017 the work expectation for responsible carers will change so as to apply only where the child is under three.

Jobcentre Plus and support for newly self-employed people

52. Since 2011, Jobcentre Plus has supported claimants who want to start a business through the New Enterprise Allowance scheme (NEA). NEA is available to claimants aged 18 of Jobseeker’s Allowance and Employment and Support Allowance (and their dependant partners), Income Support claimants who are lone parents or sick and similar groups on Universal Credit.

53. NEA provides eight weeks’ business mentoring via contracted providers to support participants in developing a business plan. Those deciding to move into self-employment can claim a weekly allowance payable over six months (£65 for the first three months, then £33 per week for the next 13 weeks). Participants may also apply for an unsecured loan through the Department for Business, Energy & Industrial Strategy Start-Up Loan.

54. NEA has supported 96,370 business starts. Of these business starts over 36,920 (39 per cent) have been by women; 22,290 (23 per cent) have been by people aged 50 and over; and 20,060 (21 per cent) by people who have declared a disability.[iv]

55. From April 2017, the Department will enhance NEA, taking account of recent research and the recommendations of the Michelle Mone review ‘Boosting Enterprise in more Deprived Communities’.[v] It will include: the introduction of a pre-NEA workshop providing claimants with an overview of the impact, commitment and responsibilities of being self-employed; an enhanced mentoring offer of up to 12 weeks; and a business development phase during which participants will have the option of a 13-week period following business plan sign-off to ensure they are ready to start trading.
56. The mentoring support for participants once they have commenced training will be extended to up to 52 weeks to align with the UC Start-up period.
57. Newly self-employed UC claimants in a Start-up period receive regular support from Jobcentre Plus Work Coaches. Jobcentre Plus is training a cadre of Work Coaches to provide them with the skills to ensure that claimants are provided with the most effective support. Work Coaches have access to sources of advice and support for self-employed claimants via the Jobcentre Plus District Provision Tool.
58. The Department recognises that low-earning self-employed UC claimants who are not eligible for a Start-up period may require support to grow their earnings. From April 2017, NEA will include a new steam of mentoring support to gainfully self-employed UC claimants who have existing businesses but earnings below their MIF. They will be offered a referral to a voluntary initial assessment with an NEA provider to assess their business and whether the support offered by this stream will help. For those whose businesses may be successfully supported, 12 weeks of mentoring will be provided to help participants develop a business growth and development plan.

Pensions: Automatic enrolment

59. The Department welcomes the Select Committee’s focus on pensions and the self-employed as part of this inquiry. The Department expects to explore these issues within the 2017 Review of automatic enrolment, as announced by the Minister for Pensions on 12th December. This will report in the course of the year and it would not be right to pre-empt or pre-judge the recommendations from that review. The following section therefore focuses on the current position with regards to the self-employed and pensions.

60. The Government is committed to helping people achieve financial security in later life and is reforming the pension system as part of its efforts to encourage a culture of saving. Automatic enrolment was introduced to enable most people in work to save for retirement. It requires employers to enrol all eligible workers into a workplace pension and for both parties to make a contribution to that pension. It has been a great success to date with over 7.1 million eligible workers enrolled and more than 370,000 employers declaring their compliance since it began in 2012[vi].

61. The framework in place for automatic enrolment is not suitable for the self-employed as the employer and worker are the same person. Automatic enrolment has always stopped short of compulsion and it would not make sense to require a person to enrol themselves only then to opt-out if they don’t want to participate in pension saving. It is, however, clearly important for this growing group of self-employed workers to think about what income they will have to live on when they retire, and for the Government to consider how they can be supported to save for retirement.

62. The self-employed were considered in the original Impact Assessment for the 2008 Pensions Act. In that Impact Assessment the Government set out that, “The self-employed will be able to join NEST to take advantage of its low charges. However, we expect the number choosing to do so to build up slowly over time. The self-employed will not benefit from an employer contribution and many will already be contributing to a personal pension, or will have an alternative retirement plan, while others will wish to prioritise building up their business”. NEST Corporation’s annual report and accounts for 2015-16 show that it has almost 2000 self-employed members.

63. Pension savings options are available for the self-employed, such as personal, stakeholder and self-invested personal pensions for example which will attract tax relief on contributions. Information and guidance on pension saving options is available from organisations like the Pensions Advisory Service and the Money Advice Service.

64. Automatic enrolment is helping to make saving for retirement a social norm. The question remains, though, whether this would be enough to prompt self-employed people to pro-actively start saving in a pension. The Government is aware that while overall pension participation is rising, participation in pension schemes among the self-employed has fallen.  The Government recognises that the self-employed are a growing, non-homogenous group. It is important that we better understand the nature and characteristics of this group to best help support them to save for a secure later life. To this end, the Department is particularly interested in findings from the Taylor Review on modern employment practices and the Business, Energy & Industrial Strategy Committee’s inquiry into “the future world of work and rights of workers” to help inform our thinking for the 2017 Review of automatic enrolment.

65. The review will be supported by an external advisory board and will consider the position of the self-employed and other people who do not currently come within automatic enrolment. The Department will announce the membership of the advisory board and its terms of reference in early February.

January 2017