Freelancers claw back IR35-lost pay, just as financial hardship hardens

Freelancers appear to have clawed back some of their daily worth that private sector IR35 reform depleted, potentially and ironically, because of the very same reform.

In its freelancer confidence index, IPSE says rates leapt in the last three months of 2021 to £584, up from £535 in July-September, and £397 in April-June -- the period when the reform hit.

Then, when some clients banned incorporated freelancers or also because of the April 6th reform, made them work via more taxing, fee-charging umbrella companies, rates fell by £48.

‘Highest average day rate’

Freelancers undercutting each other simply to secure work was also behind the-then quarterly 11% rate drop, which represented the lowest level of self-employed pay since Q3 2018.

But now almost the opposite is true, the fourth quarter 2021 index of the Association of Independent Professionals and the Self-Employed (IPSE) reveals.

In fact, on the back of hirers adjusting to the April 2021 off-payroll rules, the association says freelancers are now charging the “highest average day” rates since its index began in 2014.

‘Rising costs’

Partially, the uplift is down to “rising costs, not least the rising cost of living and prices of goods,” states IPSE’s commentary to the Q4 index released on March 17th 2022.

But only partially, because the BoE’s successive base rate hikes were only initiated in the last two weeks of December (even then it was tiny), and the war in Ukraine had not yet begun.

“The record high average day rates charged by freelancers…[is] also due to the impact of IR35 reforms in the private sector,” the IPSE commentary acknowledges.

“Freelancers [by the time of the fourth quarter] were increasingly operating within IR35 and having to charge higher day rates to cover outlays such as Employer’s National Insurance”.

‘Difficult to explain’

Further indicating IR35 reform rather than costs or inflation to be behind the freelancer pay rate recovery is the index’s recordings of managerial-level freelancers’ earnings.

The most likely of the sampled freelancers to be hit by IR35 reform, these so-called ‘SOC1’ freelancers commanded £39,512 in Q4, compared to a more modest £30,299 in Q3.

Initially yesterday, an IPSE spokesperson said it was “difficult to explain” the sharp quarterly earnings increase by such freelancers, who operate for clients at managerial level.

‘Ten to twenty per cent reduction in take-home due to IR35’

After all, a similar income spike for the SOC1 freelancers also occurred “pre-pandemic”,  the spokesperson said (referring to Q3 2019), implying covid can be ruled out as a factor in Q4.

But then, the IPSE spokesperson confirmed that managerial freelancers “likely” used the fourth quarter to increase their day rates “to cover IR35 associated costs.”

Adrian Smith, a director at recruitment giant Randstad, confirms that shrewd freelancers who are highly valuable to clients have indeed made up what IR35-induced jitters took away.

A top recruiter, Mr Smith told FreelanceUK: “I'm often asked what the impact of the IR35 rules had on [freelance] contractors, especially when it comes to wage packets.

“Well, as a guideline, [those] in scope of the IR35 rules saw between a 10-20% reduction in their take-home pay. Someone has to pay for that, and it's now driving rates [back up].” 


However far from sitting around trying to decide what to spend the cash influx on, the monies might be gone before freelancers know it. Or -- they might actually be gone already.

That’s because 38% of the entire IPSE sample of freelancers polled in Q4 admitted to being in “debt,” and 81% said that their input costs would increase over the next 12 months.

Further squeezing the bottom line, the freelancers expect an average decrease in their rates of a hefty 3.6% over the next 12 months, the association found.

This anticipated hike in costs -- coinciding with rates reducing -- might explain why freelancer confidence in their own commercial offering plummeted in Q4 from -2.4 to -11.0.

Faith in their venture for the rest of 2022 is similarly in the doldrums, given it was -2.6 (in Q3) but fell back further, to -10.5.

Freelancers’ economic outlook emerged as even more in the red, with a -16.3 confidence rating deteriorating between October-December to -23.7.

‘Biggest chunk of freelancers since 2017 forecasting cost increases’

Interestingly, IPSE signalled that internal factors in the businesses of its self-employed members do seem linked to external factors, such as the economy.

The IPSE spokesperson said: “The proportion forecasting cost increases [81%] is the highest since the fourth quarter of 2017, when the BoE interestingly also increased interest rates.”

Recommendations that freelancers press their clients for a rate increase, sooner rather than later, therefore seem eminently sensible.

‘Appreciate your freelance role for what you need’

Yet in an online post, a leading head-hunter suggested that assuming candidates can keep afloat -- or in the case of freelancers stay viable, money isn’t all that matters.

“Sometimes it's not about ‘the grass is greener’ or will an extra few thousand make the difference,” argued the head-hunter, Rebecca Bowring-Kingman.

“Sometimes it is about recalibrating and recognising that 'Utopia’ doesn't exist. There always needs to be a bit of a compromise. Stay close to what you enjoy and appreciate your role for what you need.”

However, sounding aware last week’s Spring Statement 2022 predicts inflation to run at 7.4% before the year-end, a downbeat IPSE warned: “With the vast majority of self-employed workers predicting rising business costs over the next 12 months, it is clear that the financial hardship that freelancers faced during lockdown restrictions is only going to continue post-pandemic.”


29th March 2022

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