Self Employed or Just Signed Your Rights Away?

Recent government figures suggest an increase in the number of people identifying as self-employed or operating as one-man companies. Officials present this as a sign of growing public confidence in the economy and a newfound entrepreneurial spirit. However, we don’t share this view - in fact, we openly question it.

In years past, claiming to be self-employed was not a decision taken lightly. It often came with significant downsides: difficulty securing loans or mortgages, challenges in obtaining time off, and limited access to benefits. Unless someone was genuinely self-employed - or perhaps a little mad - there was little incentive to adopt this status unnecessarily.

But things have changed. Today, we’re seeing more people claim self-employment for reasons that wouldn’t have arisen just five years ago.

One reason for this shift is the pursuit of working tax credits. To qualify, individuals must work a certain number of hours per week. With many employers cutting back on hours, workers are not only losing pay but also dropping below the minimum hours required to claim these credits—a double blow.

Some are addressing this by claiming self-employment for additional hours. For example, a part-time worker with 25 hours a week might claim to be working an extra 10 hours in a self-employed capacity. This conveniently pushes them over the threshold to qualify for tax credits.

Who checks whether these self-employed hours are genuine? The answer: virtually no one.

While the tax credits issue is concerning, a more significant and troubling trend is emerging. Many employers are no longer hiring workers directly but are instead requiring them to become self-employed contractors. These workers are then hired back as though their services were outsourced.

Here’s an example:

Years ago, haulage firms employed HGV drivers directly. These drivers received their PAYE, holiday pay, sick pay, and redundancy rights. Today, an increasing number of haulage firms are only willing to work with drivers who operate as private limited companies, often requiring them to register for VAT so the firm can reclaim the tax.

Why? Because hiring drivers as independent companies allows firms to avoid:

• Employers’ National Insurance contributions,
• Sick pay,
• Holiday pay,
• Paternity pay,
• Redundancy obligations,
• And the risks associated with employment tribunals.

This trend is accelerating. Taxi firms are another prime example, with drivers often earning as little as £4.50 an hour—far below the minimum wage of £6.70. Taxi companies argue they can’t afford to pay minimum wage plus employee benefits without being undercut by competitors using self-employed drivers.

The root cause appears to be a combination of increasing government-mandated employment benefits and rising wage requirements. Employers are simply no longer willing to shoulder the growing costs and risks of direct employment.

Features like paternity pay, higher minimum wages, and other benefits - while well-intentioned - are pushing employers to seek alternatives. Company-to-company contracts have become the safer, more cost-effective option. We empathise with this position. The risks of hiring directly are high, and the rewards are minimal.

Ironically, the government also loses out. Employers’ National Insurance contributions disappear when workers become self-employed. This shift will ultimately impact the public purse.

What we’re heading toward is not a dynamic, entrepreneurial economy but a coerced one—where people are forced to forfeit protections in order to continue working. These “self-employed” individuals are often earning below minimum wage, stripped of employment rights, and left unprotected in the event of hardship.

For us as lenders, this shift poses new challenges. We must adapt our criteria to accommodate the growing number of self-employed individuals. Determining income stability and assessing risk will become increasingly complex.

As the self-employed economy continues to grow, it’s essential to recognise the broader implications - not just for individuals, but for businesses, government revenue, and the wider economy.