Tax now worries freelancers more than the economy - here's why

What’s your biggest worry as a freelancer? If it’s things like market conditions, the state of the economy and tax, you’re in good company. As reported in IPSE’s latest Freelancer Confidence Index (FCI) survey last week, the majority of freelancers identify with these concerns when thinking about their businesses. But just how much of a worry are these issues for the self-employed, and are attitudes beginning to change?

Looking first at how confident freelancers feel about the overall state of the economy, our Q2 survey found that nearly half (48%) of freelancers are feeling less confident about the UK’s economic prospects over the coming 12 months, compared with the previous 12. Just 35 per cent felt more confident.

There’s no doubt this isn’t great reading, but it’s a noticeable improvement on the previous quarter in which 63 per cent felt less confident about the economy’s future, and only 20 per cent felt more confident. Overall, the trend is that freelancers feel slightly more confident about the economy – or more accurately, less unconfident.

One explanation could be that the return of inflation to more normal levels this year. This has likely settled some freelancers’ nerves about their clients’ attitudes to hiring, and whilst the fieldwork pre-dates the Bank of England’s decision to cut interest rates in August, expectations of a cut could well have been present in the responses.

The fieldwork also coincided with the recent general election, which the Labour Party had been expected to comfortably win from the outset. Freelancers may be hoping for a ‘new government bounce’ in the wake of the Conservatives exiting Downing Street after 14 years.

This idea is somewhat supported by how freelancers responded to the separate question of whether they feel supported by the government. In Q2 2024, more than four in five (82%) said that they do not feel supported by government, down from an overwhelming 90 per cent in the previous quarter. So, whilst there may be a modicum of optimism among freelancers that a change of government will bring a change of tack in government’s relationship with the sector, the vast majority are withholding judgement – showing that freelancers’ faith in government still needs to be earned through supportive, tailored policymaking for the sector.

Despite falling inflation, most freelancers still expect their costs to increase in the short term – and by far in excess of the headline rate of inflation.

In Q2, 60% of freelancers said that their business costs had increased in the past 3 months. Meanwhile, 64% expect their costs to increase in the next 12 months by an average rate of 9.7%.

Whilst we’ll have to wait and see how accurate these predictions end up being in future surveys, it serves as a stark reminder that as far as the cost of living crisis goes, our smallest businesses are not out of the woods yet – something which we’ll be urging the Chancellor to bear in mind at the upcoming Budget statement in October.

With freelancers’ confidence in the economy beginning to increase, you might expect them to feel a similar way about their own businesses. However, business confidence remains stubbornly low, with the number of freelancers feeling less confident on the rise.

In Q2 2024, more than half (54%) said they felt less confident about their business over the next 12 months – a 5 point increase on the previous quarter. However, this is offset by those who reported feeling more confident, which grew by the same amount.

Digging into the reasons behind dwindling business confidence, a clear frontrunner emerges – the tax system and more specifically, the IR35 rules.

Nearly four in five (79%) cited government tax policy relating to freelancing as having a negative impact on the performance of their businesses, with 61% reporting a significantly negative impact.

This was followed closely by regulations on hiring freelancers, which were cited by three quarters (76%) of respondents, including 60% who described this impact as significantly negative. And 73% said that the state of the economy was having a negative impact which, whilst high, is less severe given that only 38% described this impact as being significantly negative.

Overall, this suggests that it is the tax and hiring rules targeting freelancers – not economic conditions – that are most likely to be holding freelancers back.

It doesn’t require a leap of imagination to connect this with the impact of the off-payroll working rules which were found to be keeping one in 10 contractors out of work entirely, according to our 2024 IR35 Spotlight report and as reported in the Financial Times.

We run research like this throughout the year to help understand the issues facing your businesses and help back up our campaigning in Westminster and beyond. But we can’t do this without the help of the freelancers who respond to our surveys.

That’s where you come in – join our research community today and help us represent the sector as best as we can by taking part in our next confidence survey in late September 2024.