UK Is Europe's 'Self-Employment Capital' but Underemployment Brings Tax and Welfare Concerns

Britain is fast becoming the "self-employment capital of Europe" as people take it upon themselves to create their own work, rather than scrabble around in the labour market looking for a rare decent staff position.

But this could create future problems for the UK Treasury, because the self-employed tend to earn less than salaried employees and so don't pay in as much tax to the system, as well as relying more on welfare to boost insufficient incomes.

The thinktank Institute for Public Policy Research (IPPR) said its analysis shows that the UK has shown the fastest growth in self-employment out of all Western European countries over the last year.

This is one reason why the headline employment rate has hit new highs amid a weak economy. Despite robust employment data, underemployment – those working fewer hours than they want to – is rife and the proliferation of self-employment may be partly to blame.

The proportion of workers who are self-employed in the UK labour market has risen by nearly 1%. This was after the number of self-employed people rose by 8% between the first quarter of 2013 and the same period a year later. There are almost 4.5 million self-employed people in the UK.

"The self-employed pay themselves in various ways. Some will pay themselves a salary, others will take money out as profits etc," Spencer Thompson, senior economic analyst at IPPR, told IBTimes UK.

"So it's difficult to say whether that's changed with the increase in self-employment. But that's definitely, on average, going to be the case.

"It's also the case that the self-employed do tend to earn less than employees on average. So there is a small number of self-employed people who are very successful and they employ other people, which is good for the economy, the labour market and tax receipts.

"But at the same time there's a lot of people who are working very few hours and are earning relatively little, so you would also expect that to decrease the tax revenues etc."

Self-employed people are also entitled to claim working tax credits to top up their incomes. But the government is rolling out its Universal Credit welfare reform, a single payment for people entitled to several different benefits.

Under the new Universal Credit system, those who have been self-employed for longer than a year will be assumed to earn at least the equivalent of a full-time (35-hour week, 52 weeks of the year) job which pays the national minimum wage.

The self-employed earning below this amount – approximately £950 per month – will lose out as their welfare payment will be reduced, and they will be advised to seek "gainful" employment.