The hidden cost of self-employment
The growth of the self-employed army seems unstoppable.
Almost 5 million workers in the UK now work for themselves, prompted to go it alone by everything from the last financial crisis to their family circumstances.
But while the nation’s work style has evolved, the way financial institutions, the benefits system, government, even the expectations of those one man bands themselves have not.
And it is costing them a fortune.
The mythology surrounding self-employment is that those who go it alone earn more per day or per hour than their employed peers. But that doesn’t mean the freelance life is one of riches.
Data from the Department for Work and Pensions suggests that the average annual earnings of someone working for themselves is around half that of an employee. It’s easy to assume that’s because a large number of freelancers are working part-time only.
Dig a little deeper into the stats and it turns out the average incomes for those working 30 hours or more for themselves are dropping year on year. Between 2008 and 2014, for example, full-time or near full-time freelancers earnings dropped by 30%.
Experts suggest that self-employed workers calculate their fees and charges by taking the costs incurred by employers over a year - including gross salary, sick pay, pension, holiday leave, and training costs as well as National Insurance – and working backwards to a day or hourly rate taking into account weekends, holidays and bank holidays.
The protection gap among self-employed workers is huge. More than nine in every ten 93% of the UK’s self-employed workforce have no critical illness cover, leaving people open to financial ruin if forced to take long-term sick leave, according to new data from Scottish Widows.
This is despite business owners spending an average of £9,700 and six-and-a-half months of their lives setting up their ventures. And with one in seven UK workers now self-employed, this means that around 4.4 million of them have no protection in place if they were unable to work due to serious illness.
Taking extended sick leave would cost the self-employed an average of £67,550 each per year, amounting to a national financial risk of more than £300 billion annually.
However, four in ten uninsured, self-employed workers insist they don’t need critical illness insurance or don’t see it as a financial priority. This is despite three-quarters of business owners or partners having no employees and no-one to cover for them should they fall ill and be unable to work themselves.
Those who have their own business are putting their operations at risk in other ways too, with half admitting that they don’t insure the equipment which is crucial to running their venture, such as laptops and tools.
Self-employed workers who forego insurance are also failing to “self-insure” adequately through other means. Almost half have no other personal contingency plan in place, such as backup savings, should they fall ill, despite working-age benefits like Statutory Sick Pay not being available to the self-employed.
The most valuable working benefit of all – the workplace pension – is helping more than half the working adult population save adequately for retirement thanks in part to employer and government contributions to the scheme which is run through staff pay schemes.
Everyone working for someone else, no matter what size the business, now has a legal right to a workplace pension except the self-employed.
It’s adding to the £95bn pension funding gap faced by those working for themselves with just a third of the self-employed saving enough for older age. Considering that the fastest growing group of sole traders are older workers who would have traditionally started to wind down but can’t afford to, the old age poverty problem looks set to continue without intervention.
This summer the Taylor Review called for the self-employed to be automatically enrolled in a similar style with automatic contributions of 4% unless they choose to opt out.
“The lack of retirement provision amongst the self-employed is reaching crisis levels, and needs to be addressed,” said Steve Webb, director of policy at Royal London and a former Pensions Minister, at the time.
“The Government now needs to build on the momentum for action in this area and take forward the proposals on pensions and auto-enrolment as a matter of urgency.”
Securing personal loans and mortgages got much harder after the credit crunch. Understandably, in the immediate aftermath of a global crisis that had been sparked by irresponsible lending, the watchword became ‘affordability’.
Today, you’ll need to account for all your personal income and outgoings in order to apply for a large sum, particularly a mortgage. But for the self-employed that’s often easier said than done.
Mark Harris, chief executive of mortgage broker SPF Private Clients, says: “The good news for the self-employed is that the lending situation has improved, resulting in a much healthier environment than the one we had a number of years ago.
“As people’s work practices have changed, some lenders’ understanding and practices have evolved too. If you are self-employed with a long working history and the accounts to support it, you should continue to be fine when it comes to getting a mortgage.
“If you have the required evidence of income to meet the lender requirements, typically two years of accounts then you should be able to get the same rates as an employed person,” agreed David Hollingworth, director at London and Country Mortgages.
“It can be more costly is if you have to look at more specialist lenders, for example where there is only one year of accounts available. Lenders like Precise, Kensington and Vida can consider as little as 1 year but their rates will not be the lowest on the market.
“Having a smaller choice will inevitably reduce the chance of getting the keenest rates.”
Finally there’s the issue of personal error, particularly when it comes to tax. With many people going it alone without business or accounting experience, huge swathes of the self-employed workforce is getting their figures wrong. Recruitment trade body APSCo that four in every ten freelancers have wrongly calculated their tax. One in ten have paid too little but one in four have paid too much.