How the self-employed sector can recover in 2022

With the country (hopefully) nearing the end of the pandemic, following the end of the Omicron wave, it is finally time for the UK economy to recover after two years of economic disruption.

However, for self-employed workers, rebounding after covid is easier said than done, writes Andy Chamberlain, director of policy at The Association of Independent Professionals and the Self-Employed (IPSE). Indeed, following numerous lockdowns and variants, thousands of self-employed have lost work, gained debt and in some cases have left freelancing or contracting altogether

Following a fall in the self-employed population, work for freelancers is now returning

The pandemic has been so disruptive that the IPSE 2021 ‘Landscape’ report has found that the number of self-employed workers in the UK has fallen drastically from 4.4 million in 2020 to 4.1 million in 2021. For context, the fall represents the second consecutive year that the solo self-employment sector has decreased since the 40% growth in self-employed workers between 2008 and 2019.

Despite these rather gloomy headline figures, there have been a number of positive signs in recent months. Our research has shown that work is returning, with the number of weeks not worked by freelancers falling to its lowest level since the start of the pandemic at 3.1 weeks. Moreover, despite the fall in self-employed workers, the sector continues to contribute an impressive, estimated figure of £303billion to the UK economy a year.

The road ahead

As restrictions ease and the economy rebounds, these positive signs should hopefully spiral into a recovery for the self-employed sector. However, industry and the government must not be complacent. A full return to pre-pandemic levels of growth is far from assured as covid hasn’t been the only problem that freelancers have had to deal with over the past two years. The flawed reform to IR35, inflation, and Brexit have all shaken up the independent work sector and caused economic uncertainty for thousands of freelancers. Without government action to address these issues, recovery could be under jeopardy, with IR35 and other issues causing freelancers to pay additional costs.

We know freelancers have tried to counteract the cost of living crisis and IR35 by increasing day rates to £537 - their highest level since 2014 – but more still needs to be done to alleviate these issues.

For example, the government should delay the planned increase in National Insurance in April. The increase in NI will only add costs to freelancers at a time when they are recovering from debt and starting to generate work post-pandemic.

The government also needs to commission a full review into IR35. Implemented in April 2021, the flawed reform has made hiring organisations responsible for making notoriously complex tax status decisions. The change has had far-reaching negative consequences for contractors and been hugely burdensome for hirers too. In fact, our research has shown that the changes to IR35 in April 2021 have been so damaging that a third of contractors have been driven out of the industry since the reform.

Two respected bodies, both calling for interventions on the in-force IR35 reforms

In a related development, the House of Lords Economic Affairs Finance Bill Sub-Committee last week published new recommendations on IR35 reforms. Their Lordships rightly pointed out that determining status remains extremely confusing and that the government should make good on its commitment to clarify the status rules. They also highlighted the rapid growth of umbrella companies since the IR35 changes were implemented last year.

On the same day as the Lords’ findings were published, the National Audit Office released its own report into the implementation of the IR35 reforms, albeit in the public sector on April 6th 2017. The NAO found that the measures generated significantly more revenue than expected, indicating that clients were incorrectly determining that IR35 applied to more engagements than it should.

Imperative the government steps in to support the self-employed

If the government doesn’t address concerns around IR35 and delay the increase in National Insurance, then despite its rhetoric around supporting the economy and its workers, the prime minister and others will have jeopardized the freelancing sector’s ability to recover from coronavirus by causing further economic uncertainty for the country’s self-employed workers. Inaction will also dissuade former freelancers to rejoin self-employment and continue to deal financial damage to those freelancers and sole traders who have fallen into debt during the pandemic.

Before covid and Brexit and even IR35 reform, one of the great strengths of the UK economy was its flexible labour market -- and at the heart of that, has always been a vibrant and growing self-employed sector. But right now, that sector is feeling the strain of two years of weak economic performance and unhelpful tax legislation. If the government is serious about boosting economic growth, it must do more to enable self-employment to flourish.