National Living Wage rise risks fuelling growth of false self-employment, say tax campaigners

The Chancellor announced today that the government will increase the National Living Wage (NLW) for individuals aged 23 and over by 9.7% to £10.42 an hour from 1 April 2023.¹ The Government say this represents an increase of over £1,600 to the annual earnings of a full-time worker on the NLW and is expected to benefit over 2 million low paid workers.²

The government has also accepted the Low Pay Commission’s (LPC) recommendations for the other National Minimum Wage (NMW) rates to apply from April 2023.

While LITRG, in general, welcome the government’s bold ambitions for the minimum wage, they submitted a response to the LPC consultation earlier this year highlighting some considerations for the LPC in terms of the impact of increased rates.³

Meredith McCammond, LITRG Technical Officer says:

“As we said in our LPC submission, on the one hand, we appreciate how important a decent pay rise can be every year, in terms of morale and productivity. On the other hand, there is an important balance to be found to ensure employers don’t react in a way that leaves workers even worse off.

“Increases in the minimum wage obviously mean that extra costs are borne by the employer – not just the prima facie rate rise – but also increases in employer’s National Insurance contributions (NIC), holiday pay and pension contributions. This is because they are all based on the higher NLW rates.

“Some employers will have already been contending with difficult trading conditions and increasing costs and may struggle to absorb any further large increases at this time. As such, we are concerned we will see more ‘false self-employment’ in coming years, the effects of which can be detrimental and far reaching.’

False self-employment, LITRG explains, is treating a worker as self-employed when the true nature of his/her engagement is that of employment. Self-employed people are not entitled to the minimum wage.

The group say that engagers who treat their workers as self-employed to avoid obligations in relation to the minimum wage will also usually not be operating PAYE as they should be, or giving their workers other employment rights for example in relation to holiday pay.

False self-employment can also have other knock-on effects which feed into the question of worker well-being. If people are treated as self-employed for tax purposes, they will not be entitled to paid sick leave and other statutory leave/entitlements.⁴ In addition, they may not have ‘right to work’ checks, meaning people may be working illegally (and are therefore vulnerable to exploitation). The engager may also decide they don’t need to have Employer’s Liability Insurance.

Those treated as self-employed for tax purposes are likely to declare themselves as self-employed for benefit purposes. In Universal Credit (UC), some self-employed claimants tend to face a more burdensome and less generous route than employees – a double whammy for the worker.⁵

Meredith McCammond continues:

“We hear a lot from workers who appear to be in false self-employment – particularly in the care sector and the construction sector. Historically the driving force behind false self-employment was the avoidance of employer’s NIC. However, given the Employment Allowance has taken many employers out of paying employer’s NIC and we are still hearing from falsely self-employed workers, we think that avoidance of the minimum wage may now be playing a part.

“In terms of future NLW movements, it is important – and widely accepted - that consideration is given to both worker need AND the affordability for employers. And the level decided upon needs to be enforced effectively as well as enacted. The key point is that policy in this area should be based on research, evidence and careful analysis, so that any other impacts are fully understood.

“In the meantime, the authorities need to make sure that they have a plan of action and sufficient resources in place to deal with false self-employment cases, otherwise the overall objective of improving outcomes for the lowest paid could be seriously undermined.’’

Notes for editors

1. ​See para 5.10 in the Autumn Statement 2022 document.
2. LITRG note that because of interactions with tax, National Insurance and other systems, such as student loans, universal credit and tax credits, not everyone will feel the full benefit of £1,600.
3. The submission can be found here.
4. If someone is not paid under PAYE then there will be no secondary contributor. This means the worker cannot be entitled to Statutory Sick Pay or any other statutory payments for that matter, e.g. Statutory Maternity Pay, etc. A secondary contributor is someone who is liable to pay Class 1 secondary National Insurance Contributions). Secondary contributors are responsible for administering and part-financing statutory payments under the Social Security Contributions and Benefits Act 1992.
5. The rules in UC for some self-employed claimants tend to be less generous/more burdensome than for employees. For example, the Minimum Income Floor (MIF) rules (which treat people as earning a certain amount when calculating their monthly UC, even if they haven’t) penalise those who have fluctuating incomes and those who have big business expenses that fall in one month rather than spread over the year. For more information and some examples see this LITRG report.