Help Is Coming For (most Of) The Self-employed
27th March 2020
Institute For Fiscal Studies
Stuart Adam and Helen Miller - Observation.
Today (26 March 2020) the Chancellor announced new, very generous support for the self-employed. Those who earn the majority of their income from self-employment and who had average profits of no more than £50,000 over the last three years will be eligible for a taxable grant equal to 80% of the average profits they reported across the three years from April 2016 to April 2019, up to a cap of £2,500 per month, if they report that their income has been negatively impacted as a result of coronavirus. This should provide welcome relief to most of those in self-employment.
The government has chosen a policy that, for those self-employed people who can carry on working at all, is more generous than the JRS for employees because people will be able to get it however small their fall in income and not only if they cannot work at all. Other implications of the policy design include:
We expect almost everyone who gets more than half of their income from self-employment and earns less than £50,000 to take up this policy, both because very few businesses will have been unaffected by coronavirus and because it would be extremely difficult for HMRC to know if people were misreporting a negative impact.
The grant, which is based on past profit rather than current incomes, will give just as much to those who have seen only a small fall in profits as to those who have lost all of their income.
Some people, including those whose profits fall by less than 80% as a results of the coronavirus and those whose profits were falling, will be better off than they would have been without coronavirus.
The policy does not disincentivise people from continuing to work, either in their original trade or by taking a new job. This is a welcome feature.
Getting support to the self-employed is difficult. The government have opted for a relatively light touch policy that gets cash to most self-employed people as quickly as administratively feasible. The payment will not be made until June, so the self-employed will have to rely on borrowing or benefits to cover short run falls in income; this should be easier now that they can be certain that a payment will be made.
Who is left without support
Taking the new self-employed scheme, the CJRS and changes to the benefits system together, these are the main groups that may will not benefit:
There are two cliff edges in the self-employment scheme as a result of the conditions that, to be eligible, the self-employed must (a) get more than half of their income from self-employment and (b) have a trading profit of less than £50,000 in 2018-19 or an average trading profit of less than £50,000 from 2016-17, 2017-18 and 2018-19. This means that those who just miss these criteria will get no support despite looking quite similar to some of those who are eligible.
People who set up a business in the last year (and did not therefore file a 2018-19 tax return) do not have access to the scheme, a choice driven partly to reduce fraud and partly by the practical need to identify the self-employed. This is a significant number of people. For example, between 2014-15 and 2015–16 (the most recent years for which we have data from tax records), there were 650,000 sole traders starting up (alongside 580,000 exiting)
Company owner-managers who pay themselves mostly through dividends. Those running their own incorporated businesses are not eligible for the new scheme. They are, we believe, eligible for the CJRS in relation to their salary if they stop working. However, the HMRC tax records show that many owner-managers pay themselves a very small salary (often set at the National Insurance earnings threshold, which is currently £166 per week) and take the rest of their income in dividends. This is the tax-efficient choice. However, it means that the CJRS will cover only a small part of their actual income.