Laura Gardiner: The risks and rewards of being self-employed

Since the recession, the Yorkshire and Humber region has added 14,000 employees but an extra 22,000 self-employed people.

It looks as if higher levels of self-employment are here to stay but our research suggests that while most of the self-employed prefer being their own boss, they often struggle with accessing basics such as housing and credit.

What can be done to help the UK’s 4.5 million self-employed prosper?

Today one in every seven workers is self-employed with the recession doing little to halt the surge in their numbers seen since the early-2000s.

Yesterday’s report from the Resolution Foundation finds that this growth isn’t down to any particular kind of person deciding to become self-employed since the crisis. Instead, it seems to reflect a more broad-based trend – people from a variety of backgrounds are starting out on their own.

There are many reasons why being self-employed will appeal. It offers the opportunity to those of an entrepreneurial bent to create and grow their own business. For many older people, it appears that self-employment offers a way to wind down into retirement. The growth in numbers is backed up by what the self-employed themselves say: the majority prefer working for themselves and making the shift was a personal choice.

But for the undoubted freedom that self-employment brings, it comes with difficulties too. The self-employed do not benefit from the same protections as employees. While those working for someone else are guaranteed to earn at least the National Minimum Wage, the self-employed face the possibility of earning less.

The pockets of the typical self-employed person have been even harder hit than those of employees over recent years, with their weekly earnings now 20 per cent lower than they were in 2006-07. By comparison, typical employees have seen their wages drop by six per cent over the same period.

Low earnings are, of course, part of the risk and reward at the heart of self-employment and low incomes in the early years can sometimes be a price worth paying once a business starts to flourish. But worryingly, it is those aged 35-50 who you would expect to be at their peak earnings power who have experienced the biggest fall in earnings.

Nor is it just earnings where the self-employed look vulnerable. Only 30 per cent of those who work for themselves currently pay into a pension, compared with half of all employees. The roll out of auto-enrolment pensions looks set to widen this gap in coverage even further.

The self-employed also face disadvantages in the here and now, in accessing basic products and services. One in five of those who tried to get a mortgage said they were prevented from doing so due to being self-employed. 15 per cent say they had been unable to obtain personal credit or loans because of their employment status and one in twenty had even had trouble finding a tenancy because of being self-employed.

What then could be done to better serve this growing portion of the UK’s workforce? On the issue of pensions, one of the main strengths of the new single tier state pension system (to be introduced from 2016) is that it will equalise the treatment of the National Insurance contributions of the self-employed with those of employees.

There is always a need for caution when talking about making it easier for people to access mortgages. Assessing the affordability of a financial product will often be more challenging when dealing with the lumpy and unpredictable income of a self-employed person. But when taken together with difficulties around personal credit and renting, it does appear the self-employed are disadvantaged solely by the nature of their employment.

In recent weeks the Mortgage Market Review, which sets more stringent conditions on lending, only looks likely to exacerbate the struggles faced by the self-employed. Financial products which suit the circumstances of those who work for themselves will become all the more needed.

Despite these challenges, the majority of the self-employed prefer their current status. But the research also highlights there are reluctant recruits among this growing army of the self-employed. Of those who became self-employed in the past five years, a quarter said they did so due to a lack of better work alternatives.

While being self-employed can be a highly rewarding endeavour, it is important not to gloss over its struggles. Increased awareness of the struggles and insecurity is needed to ensure that self-employment remains an attractive option.​

Laura Gardiner is a policy analyst at the Resolution Foundation and co-author or the its new report, Just the Job or a Working Compromise? The Changing Nature of Self-Employment.