Freelancers’ rates slump with IR35 blamed

IPSE says freelancers’ day rates have fallen in response to IR35 legislation, but that longer-term confidence is rising.

'Self-Employed' written on blackboard

 

Freelancers’ average quarterly earnings slump by over £2,100 – to £18,652 after a surge earlier this year, according to IPSE (the Association of Independent Professionals and the Self-Employed).

IPSE’s Confidence Index shows this is because predominantly managerial and professional freelancers are cutting their day rates – down from an average of £445 last quarter to £397 in the second quarter of 2021. That rate is lower than during the pandemic and the lowest overall since 2018.

IPSE says this seems to be because freelancers are having to compete for fewer contracts as work levels still fail to return to pre-pandemic levels. It blames in part IR35 legislation which came into effect in April and which, it says, has led many businesses in the private sector to cease engaging freelancers. Its polling shows between 60% and 72% of professional and managerial freelancers said IR35 legislation was one of the biggest factors negatively affecting their business.

Despite these problems, however, the index shows freelancers’ confidence is rising and they are also more optimistic about the long-term prospects for their businesses. While their confidence in the performance of their businesses over the next three months has risen to its highest since 2018, their 12-month business confidence has reached its highest level since 2015.

Derek Cribb, CEO of IPSE, said: “It is now clear – as we feared – that the changes to IR35 were introduced into the private sector at the very worst time: just when they were most likely to hamstring the freelance recovery. Now just when there should be a surge in freelance work to support the wider economic recovery, many freelancers are finding themselves competitively slashing their day rates to fight it out over fewer contracts.

“It is not all bad news though: it is promising that there is so much optimism among freelancers about the economy and their businesses’ long-term prospects. Clearly, freelancers see a brighter future when the post-IR35 chaos settles. This also shows a path for government: stepping in to regulate umbrella companies and clear the mess after IR35 would not only boost the freelance sector, but also unleash its potential to drive a faster and fuller economic recovery.”

Meanwhile, a survey from advisory firm BDO has found that 55% of SMEs using contract workers are delaying compliance with IR35 rules until they are on a firmer, post-pandemic, footing. HMRC has said there will be a so-called soft landing in the first year for those who do not comply with the new rules, but that a taskforce will soon be launched to clamp down on tax avoidance.

National Insurance rises

IPSE also joined others, including the Early Years Alliance, to criticise the impact of the National Insurance hike for the NHS and social care announced yesterday. It said the 2.5% tax [1.25% on employee earnings and on employer wage costs], which covers the employed, the self-employed and dividends, would make it “almost impossible” to be a freelancer working through a limited company, a group who were excluded from support during the pandemic and have just been hit by changes to IR35 self-employed taxation.

The Early Years Alliance said the rise would hit nurseries badly unless government support was increased. Neil Leitch, chief executive of the Early Years Alliance, said: “The rise in National Insurance contributions announced today will put even greater pressure on early years employers, mainly of whom were already struggling to afford year-on-year increases in the national minimum and living wages.

“For years now, early years funding rate rises have failed to even come close to covering the growing cost of delivering early years places. Without an urgent and significant increase in sector funding, today’s announcement may well be the final straw for those providers who were already on the brink of closure.”

The British Chambers of Commerce and the CBI also expressed concerns about the impact on jobs and growth at a time when the economy was struggling to recover after the pandemic. The tax will go to helping the health service recover from the pandemic and to addressing the crisis in social care. It has been welcomed by the care sector, but there are concerns that it is not sufficient. Meanwhile, the Institute for Fiscal Studies said that, while welcome, creating a new tax would create “yet more quite unnecessary complexity” and there are concerns that poorer people will end up paying disproportionately more of their wages with Labour’s Keir Starmer accusing the government of ‘hammering’ workers.

Meanwhile, a poll of 2,134 workers in England and Wales, conducted by BritainThinks on behalf of the TUC, has found that low-paid workers have been hard hit by the pandemic, with, for instance, only a third of low-paid workers saying they get full pay when off sick compared to four in five high-paid workers.



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