Sam Robinson is a Senior Researcher at Bright Blue. Their new report, ‘Work in progress? Supporting the self-employed after the pandemic’, is available here.
First came the Covid-19 pandemic. Then came soaring inflation. The UK’s self-employed are facing unprecedented strain this year. Now more than ever, there is a need to support self-employed people through tough times.
Bright Blue has this week published a new report, Work in Progress?, which proposes new policies to better help self-employed people navigate individual and national crises.
Although the focus now is on getting through the cost of living crisis, the impact of the pandemic on self-employment can teach us valuable lessons about how to improve support for self-employed people in the future; it was both a natural experiment for new policies like the Self-Employed Income Support Scheme and a stress test for existing forms of support like Universal Credit (UC).
There are four main lessons from the pandemic that policymakers need to take on board when designing reforms.
First, the self-employed deserve a stronger safety net. As part of our research, we polled a representative sample of self-employed people in low- and middle-income households, and conducted in-depth interviews with a range of them.
Around one in seven of those we polled said they wanted governmental support during the pandemic but were unable to access it. In our interviews, the lack of sick pay and effective protection against unexpected events for self-employed people was a recurring theme.
However, there is no overwhelming clamour from self-employed people for more taxes; a minority (41 per cent) of those we polled were receptive to the idea of higher taxes on the self-employed in exchange for greater state support. But a larger proportion wanted to either keep taxes and state support at roughly the same level (32 per cent) or reduce taxes and state support (16 per cent).
There are ways of strengthening support without raising taxes or widening the fiscal ‘black hole’ yet further.
First, the government could introduce a ‘Business Crisis Loans’ (BCL) scheme, available for self-employed people eligible for UC who experience a week or more of illness, late business payments, or an urgent one-off expense.
Over time, claimants would have to pay the BCL back. In this respect, the scheme would not be the same as sick pay. Rather, this would be a way of extending financial support to vulnerable self-employed people quickly when they most need it, while minimising the impact on state spending.
Second, self-employed people need to be rewarded to save flexibly. Even before the pandemic, self-employed people were on many measures more financially vulnerable than employees. But we found that over the course of the pandemic, over half of self-employed people had to dip into their savings. Now, many self-employed people are facing the prospect of getting through a drawn-out recession with a depleted rainy day fund.
This is not a problem that will be solved overnight. But we can put in place measures to strengthen the financial resilience of the self-employed for future crises. One way is to introduce flexible auto-enrolment for self-employed people, both for retirement and unpredictable events.
The overall contribution rate should be lower than for employees, starting at one per cent of qualifying earnings before rising to four per cent after four years. To boost savings further among those self-employed people who most need it, low-income self-employed people should receive a top-up from the state for their contributions.
Self-employed people would be able to split their contributions between a conventional pensions pot and an ISA of their choice, which they would be able to access flexibly.
Third, we need to widen financial choice for the self-employed. While commercial forms of financial support, such as bank loans and credit cards, were widely used by self-employed people during the pandemic, a significant proportion (16 per cent) of self-employed people in low- and middle-income households wanted but could not access the commercial financial support they needed. This was largely driven by a lack of suitable products and a lack of awareness of what support was available.
Government should allow self-employed people on low incomes to pause repayments on their Start Up Loans (SULs) for up to six months across the lifetime of the loan. SULs have proven an effective policy to help people stay in self-employment by providing the injection needed to make their businesses viable. Giving low-income self-employed people a helping hand to develop their business can help nurture the entrepreneurialism the UK will need to get us back to economic growth.
More radically, government could create a fund to provide £10,000 of starting capital for mutual guarantee societies (‘MGSs’) which include self-employed people.
These are usually groups of small businesses that support each other to access low-interest loans from banks by using their cash assets as collateral to guarantee each other’s loans. In essence, they aim to improve the leverage of small businesses so they can access more favourable lending terms for business finance. This approach is used elsewhere in Europe, where MGSs are well-established and regulated.
Government could create a fund for self-employed people and SMEs to access starting capital to set up an MGS. This fund would be open for a five year trial period and limited to 100 successful applicants only. Should MGSs prove successful in the UK, then they could be rolled out further.
Finally, the Government needs to ensure that future support for self-employed people is well targeted. The pandemic affected some groups of self-employed people particularly badly, and there needs to be more attention paid to how support can be better tailored to those self-employed people that most need it.
In particular, lower-income households should be a priority for new measures to help the self-employed. There also needs to be more attention paid to certain groups who were adversely affected by Covid-19 but were less likely to access support, such as self-employed people aged 45 and over and the longer-term self-employed.
After suffering an economic hammer blow, the astonishing expansion of self-employment in Britain seen since the turn of the century is in jeopardy. But with ambitious reform, the Government can help self-employed people weather current and future economic storms, and in the process help thousands of businesses up and down the country to thrive.