The UK’s self-employment boom: we’re only seeing half the picture

Posted on May 12th, 2014 | News and opinion

The media has been ablaze in the last fortnight with news that the UK’s steadily falling unemployment rate is being driven primarily by a rise in self-employment, rather than a recovery of permanent jobs.

Depending on who you speak to, this is either great news or a disaster. The Government is in the midst of a year-long victory lap, 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-4.5 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 our own 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. This report from Tax Research does an admirable job of tying together the available information – there’s just no definitive source, though.

What are people actually earning?

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 thousands 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 from evidence given at a House of Lords Committee last December 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 – because we look after thousands of them – 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.

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.

Sole Trader vs Limited Company earnings

Volume (circle size) and average wage of new Limited Company Directors (left) and Sole Traders (right)

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.

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Written by Jon Norris

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