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Universal Credit (UC) poses a threat to UK entrepreneurialism and is in urgent need of reform, according to a new open letter from business, union and charity leaders to Department for Work and Pensions (DWP) Secretary Esther McVey.

The letter flags the damage that the Minimum Income Floor (MIF) – an assumed level of earnings which dictates UC payments for the self-employed but not employees – is doing to the UK’s 4.8 million-strong self-employed community.

Because sole trader incomes typically fluctuate over the course of a year, calculating monthly UC entitlements according to the MIF sees self-employed claimants lose out compared to employees. A sole trader earning £12,000 a year, for example, can receive £2,500 less in UC entitlement per annum than an employee earning the same amount.

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The letter – signed by the Federation of Small Businesses (FSB), Royal Society of Arts (RSA), National Farmers’ Union (NFU), Royal Agricultural Benevolent Institution (RABI), The Trussell Trust, Gingerbread and the Child Poverty Action Group (CPAG) – calls for application of the MIF to be reformed to reflect the realities of self-employment.

Self-employed claimants are only exempt from the MIF during their first year of claiming UC, despite evidence indicating that it takes at least three years for a self-employed person to reach the MIF’s assumed level of earnings.

The Work and Pensions Committee recently stated that the DWP has not offered “any evidential basis” to justify such a short Start-up Period. The Committee argues that enforcing the MIF at such an early stage “flies in the face of the entrepreneurial spirit the Government wants to nurture.”

Signatories to the letter are calling for the Start-up Period to be extended to take account of the realistic timeframe required to establish a viable business. As the rollout of UC continues apace, they are also urging the DWP to thoroughly assess its impact on the self-employed community. UC is expected to support 700,000 self-employed claimants by 2022, but no significant analysis of its effect on sole traders is expected until at least autumn 2019.

FSB National Chairman Mike Cherry said:

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“The Universal Credit system is stifling the job and wealth creators of the future. Of course you can’t support struggling businesses forever, the problem is that Universal Credit – as it currently stands – doesn’t even give sole traders the chance to get off the ground. Not every entrepreneur can be blessed with a lot of start-up capital. Allowing the self-employed time to establish themselves under Universal Credit would be better for the public purse over the long-term than the existing approach of severing their support after 12 months.

“Self-employment often provides a route into the workplace for those who struggle to hold down a regular 9 to 5. Almost half of sole traders who receive tax credits have caring responsibilities – a third suffer from a disability. A Universal Credit system that hurts the self-employed is one that hurts society’s most vulnerable.”

Gingerbread Chief Executive Rosie Ferguson said:

“Limited opportunities for flexible or part-time work mean many single parents rely on self-employment. Self-employed and entrepreneurial single parents are already approaching Gingerbread, worried about how they will make ends meet under Universal Credit. Current rules are too strict and place too high a threshold for low-paid single parents attempting to earn a living while juggling childcare responsibilities. More flexible and responsive rules for the self-employed would help to make good on the government’s promise to ensure that work always pays.”

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