Is the UK’s steadily falling unemployment rate being driven primarily by a
rise in self-employment, rather than a recovery of permanent jobs?
Depending on who you speak to, employment figures are either
great news or a disaster.
With imminent election, the Government is happily repeating
the falling unemployment figures to anyone who will listen, but bodies such as
the Trade Union Congress have issued alarming reports that Britain’s now-4.7
million-strong self-employed workforce lack job security and employee rights,
earn well below the average wage, and have started their own business due to a
lack of better options.
Often with political issues such as this, the real answer lies
somewhere in the middle. However in this case it looks as though both parties
could be telling the truth, but talking about different things.
The numbers problem
Self-employment numbers as reported by the Office for
National Statistics aren’t concrete figures – they’re the result of sample
surveys.
So the ONS numbers aren’t recording the exact number of sole
traders, umbrella contractors, limited company directors or any single specific
legal entity – they’re recording the number of people that identify as
self-employed.
UK self-employed
We know from available research that sole traders are more
likely to identify as self-employed, while limited company directors are more
likely to see themselves as “business owners” or “company directors” – even if
they’re running a company of one. So it’s relatively safe to assume those
classed as “self-employed” by the ONS are sole traders.
But what about the
limited company freelancers and contractors? It would appear they’ve been
largely excluded from the debate up until now.
Attempting to compare sole traders and one person limited
companies is where we encounter the biggest problem in the self-employment
debate. The data we need to get the whole picture is split between the ONS
Labour Force Statistics, HMRC’s Self Assessment receipts and Companies House
data.
What are people actually earning in the UK?
According to HMRC’s Personal Income Statistics, the average
income for a self-employed person in the UK is around £13,500 per year – which
would seem to back up the TUC’s “low paid jobs” line. However this group’s
average earnings is weighed down by a huge number of people who earn very
little (a few thousand pounds per year) through their self-employment. This
group – over a million of them – are the moonlighting freelancers, doing work
here and there to supplement their income.
As to what the average full-time sole trader earns, it’s
very difficult to tell. Tax Research estimates around £19,000.
But again, what of the limited company brigade? We know that
43.5% of limited companies in the UK are freelancers and contractors. Based on
that ratio about 230,260 one-person limited companies were formed in 2013/14
(about 35,000 more than the previous year). In the same period roughly 326,000
people became sole traders.
We know that one-person limited companies earn on average
£58,200 per year. Compare that to the Tax Research figure of £19,000 for sole
traders and it seems we’re looking at a two-speed self-employment boom.
High earners quitting day jobs
On one hand, high earners are quitting their jobs,
incorporating, and earning more than twice the national average wage. These are
the entrepreneurial go-getters that Osborne and Cameron love to lionise.
On the other hand, those taking their first steps into
self-employment are sole trading, earning a somewhat lesser wage (below the
national average in many cases) and missing out on employee rights and job
security. This is the group the TUC and others are concerned about.
To attribute the entire self-employment boom to either group
is patently inaccurate – however this kind of nuance tends to get lost in
political debate.
Do sole traders earn less than limited company directors?
Based on the available data we can conclude that sole
traders earn significantly less than Limited Company Directors – and the former
group is growing faster. This trend could change over time though, as those who
have been freelancing longer tend to earn significantly more.
The TUC’s claim that the UK’s burgeoning ranks of
self-employed workers are going it alone out of necessity doesn’t appear to
wash, though.
A survey by RSA found only 15% chose self-employment due to
a lack of better options (over 50% chose it “to have more freedom”), Global
Entrepreneurship Monitor found the number freelancing out of choice was five
times higher than those forced into it, and the Resolution Foundation reported
that almost three quarters (72%) of newly self-employed professionals prefer it
to salaried work.
It may be a while yet before the UK’s exploding self-employed
population is fully understood – not least due to the problems understanding
how they work and what they earn. It seems clear from the available data that
the vast majority enjoy their job but, just like full-time employees, will have
to wait for their wages to recover to pre-recession levels.
How to maximise your earnings
Of course, everyone’s work situation is different and advice
will differ from client to client – we are here to help provide guidance
whatever your circumstance may be.
Contact Omni
Chartered Accountants today for information about how you could benefit by
incorporating your current as a limited company or not, as your case may
actually be.
