80% of self-employed people in Britain live in poverty

Freelance perks mask growing fears of financial ruin for millions

Warnings are growing over the financial consequences of being self-employed (iStock)

Freelancers, the gig economy, the self-employed army; whatever you call them, the numbers are on the rise. Workers are embracing greater flexibility and control over their hours by working as freelancers who dictate their own hours rather than submit to the grind of the 9-5. But whether they work via platforms such as Uber or Etsy, or as consultants within specialist industries, there’s growing concern that these workers are missing out on financial security.

Research from IPSE, a membership body that supports freelancers and contractors, shows that between 2008 and 2015 the number of freelancers in the UK increased by 36 per cent to just under two million. In some fields the statistics were even more dramatic with media freelancer numbers, for example, growing by 115 per cent in that time.

And with various perks, there are plenty of reasons why the ranks are swelling. “There are a lot of benefits to working for yourself; from dictating your own working hours, to negotiating your own rates, to being your own boss,” says Chris Bryce, CEO of IPSE. “Most importantly we see that those who are self-employed are able to create their own work/life balance, one which best suits them.”

“We have also seen a huge rise in the number of freelancing mothers – an increase of 70 per cent over the last five years,” he adds. “It is clear that freelancing can provide an adaptable lifestyle that full-time employment can’t.”

But warnings are growing over the financial consequences.

Poorer chances

Talk of freedom, flexibility and a work/life balance can make freelancing, and self-employment more generally, sound like a dream. However, official figures on poverty cast a worrying light on the rising numbers. Analysis of data released by HM Revenue and Customers shows that almost 80% of self-employed people in the UK are living in poverty, according to Tax Research UK.

Head of analysis for the Joseph Rowntree Foundation Helen Barnard warns that many people freelance because they can’t find secure work. “The experience of many self-employed people does not reflect the image of the vibrant entrepreneur developing and growing an innovative, high-earning business, as often depicted by politicians.

“Many self-employed people work in low-paid industries, like cleaning or taxi-driving, and are unlikely to employ anyone else or grow into a bigger business. The typical self-employed person earns 40 per cent less than an employee and is more likely to live on a low income. During the recession, many more people became self-employed, but income from self-employment fell much more than employees’ wages.”

Around 55 per cent of the self-employed have monthly incomes that are less than two-thirds of median employee earnings, warns the Social Market Foundation, which predicts the national living wage will widen the gap further as freelancers and the self-employed more generally will not receive the increase.

Such poverty explains rising debt levels among self-employed workers. Research commissioned by the TUC and Unison show that self-employed workers are also more at risk of problem debt. In 2012, 6 per cent of self-employed workers with credit commitments were in serious debt, but by 2014 that had almost tripled to 17 per cent.

Pension pitfalls

Many freelancers risk a poorer future too. Unlike employees they will not receive auto-enrolment pension contributions from their boss and many may struggle to put aside extra cash each month.

Research from Royal London shows that pension take-up among the self-employed more generally is not just low; it’s falling. Steve Webb, director of policy at the mutual life, pensions and investment company, says: “Self-employed people are missing out on the surge in pension scheme coverage among employed earners. Indeed, whilst the number of self-employed people is growing, their membership of pension schemes has collapsed and is now at crisis levels.”

Buying protection

There are also other, smaller risks that may not occur to new freelancers, such as the need for public liability insurance, or even protection in case they are called to jury service. Fortunately, there are financial protections that can be purchased either as part of a membership package through an organisation such as IPSE, or as a separate insurance policy.

“Completing jury service is a civic duty that many Britons take pride in, but our research reveals it often leaves them out of pocket,” notes Martin Scott, head of Churchill Home Insurance. “One freelance lawyer has claimed over £5,000 from their policy for lost wages when they were called to serve on a jury for eight days.”

Freelancers also have to carry out admin tasks that most employers have an entire HR department to deal with, and that’s essential work that doesn’t pay. Rich Preece, spokesperson for accountancy software company Intuit, explains: “As more people go self-employed, sell services in their spare time, or alter their working patterns to earn additional income, one of their key challenges will be to ensure that managing the financial and tax aspects of their multiple revenue streams doesn’t take away time from actually bringing in money.”