• Freelancers’ average quarterly earnings have risen 20 per cent from £17,283 at the end of last year to £20,778 – the highest since Q1 2020
• This was driven by rising day rates (up from £412 to £445) and falling spare capacity (down from 4.3 to 3.7 weeks)
• Freelancers’ three-month and 12-month confidence in the UK economy has risen to the highest level since Q4 2015, before the EU referendum
• However – most likely because of IR35 – freelancers’ three-month confidence in their businesses has fallen while their 12-month confidence in their businesses has remained at the same level
• Freelancers state that the two main factors negatively affecting their business are government regulations relating to hiring freelancers and government tax policy – above the pandemic

This quarter, freelancers’ earnings have risen by 20 per cent from £17,283 in Q4 2020 to £20,778 – the highest since Q1 2020 at the beginning of the UK lockdown. This was driven by them increasing their day rates and also by a reduction in their spare capacity (the number of weeks they go without work each quarter). However, although their spare capacity dropped somewhat – from 4.3 to 3.7 weeks – it has still not returned to pre-pandemic levels of 3.3 weeks or less. This was counteracted by a sharp increase in freelancers’ average day rates from £412 to £445 – the highest level since Q3 2019.

Freelancers’ confidence in the UK economy also recovered to pre-pandemic levels. Freelancers’ confidence in the economy over the next three months increased from -27.8 to -4.3, the highest level since Q4 2015 – before the EU referendum. 12-month economic confidence increased from -27.7 to -0.2 – also the highest since Q4 2015.

There has not been a recovery, however, in freelancers’ confidence in their own business performance. Freelancers’ 12-month confidence in their businesses has remained stagnant at -15.6, while their three-month confidence in their businesses has actually decreased – from -11.9 to -13.9. This is the first time since the beginning of IPSE’s Confidence Index in 2014 that freelancers have had less confidence in their own businesses than the economy.

The reason for this stark change seems to be the government’s new IR35 tax legislation, which affects freelancer hiring. This is reflected in the fact that rather than the pandemic, freelancers said the two main factors negatively affecting their businesses were government rules relating to the hiring of freelancers (72.9%) and government tax policy (68.5%). The third most significant negative factor was the state of the UK economy (65.6%). By contrast, freelancers said the three main positive factors for their businesses were their brand/reputation (60.8%), innovation in their services (51.9%) and organisations adopting flexible working practices (50.9%).

There was further less positive news in freelancers’ predictions for the year to come. Although there has been a sharp increase in freelancers’ day rates this quarter, 50 per cent expected their rates to decrease over the next 12 months – by an average of 6.2 per cent. A majority of freelancers (67%) also expected their business input costs to increase over the coming year – by an average of 7.4 per cent.

Looking at the three-month outlook, freelancers’ business confidence saw a small decrease from -11.9 in Q4 2020 to -13.9 this quarter. With the successful roll-out of Covid-19 vaccinations and the government announcing the roadmap out of restrictions, it might be expected that freelancers’ confidence in their own businesses would pick up. However, the decline in confidence for three-month outlook could be attributed to the continuing restrictions and also worries about the changes to IR35 that came into effect in April 2021.

Looking at freelancers’ confidence in their businesses over the next three months in more detail reveals that there were decreases in the confidence of both SOC1 managerial and SOC2 professional freelancers. SOC1 managerial freelancers’ confidence dropped from -11.2 in Q4 2020 to -16.7 in Q1 2021 while SOC2 professional freelancers’ confidence decreased from -20.9 to -31.7 in the same period. This reflects the fact that SOC1 and SOC2 freelancers are those most likely to be affected by the changes to IR35.

SOC3 freelancers working in associate professional and technical occupations, on the other hand, actually experienced an increase in business confidence from -3.9 in Q4 2020 to 4.3 this quarter. This means that their business confidence is now in positive territory for the first time since Q4 2019.

Despite the positive confidence among SOC3 associate professional and technical freelancers, the average three-month business confidence index score decreased from -11.9 in Q4 2020 to -13.9 in Q1 2021, driven by the sharp decreases seen in SOC1 managerial and SOC2 professional freelancers.

In the quarterly report for Q4 2020, we found rising business confidence across all three groups but at a slower rate among SOC2 professional freelancers. However, for the first quarter of 2021, freelancers’ business confidence for the next 12 months stagnated at -15.6 – the same as reported in Q4 2020 with falling business confidence for both SOC1 managerial and SOC2 professional freelancers. This quarter, SOC1 managerial freelancers reported a significant decrease in business confidence over the next 12 months compared to last quarter, falling from -11.2 to -29.5 in Q1 2021. SOC2 professional freelancers saw a smaller decrease in 12-month business confidence from -35.7 in Q4 2020 to -34.6 in Q1 2021. These decreases among the most highly skilled freelancers reflects recent research into the impact of IR35 reforms that showed that over two-thirds of freelancers (70%) were concerned about the impact of the changes, with 53 per cent stating they were very concerned. Among those operating through limited companies (largely in SOC1 and 2) – and who are most likely to be affected – 88 per cent said they were concerned, including 75 per cent who were very concerned.1

The 12-month outlook for SOC3 associate professional and technical freelancers, on the contrary, saw a signifcant increase in Q1 2021 with their business confidence increasing from 0.3 in Q4 2020 to 10.7 this quarter demonstrating their positive outlook for the coming year. 

We now move on to explore the factors that freelancers identify as having an influence on their business performance. Government regulation related to hiring freelancers (72.9%) is now cited as the main factor negatively affecting freelancers’ business performance, while government taxation policy relating to freelancers (68.5%) is cited as the second most detrimental factor. The fact that government taxation policy has been superseded by government regulation in relation to hiring suggests freelancers are now more concerned about how they will be able to secure contracts after the IR35 changes. Although government taxation policy was the second most selected factor, the proportion of freelancers selecting this has increased from 67.4 per cent in Q4 2020 to 68.5 per cent this quarter. Similar to previous quarters, the third factor most negatively affecting freelancer business confidence was the state of the UK economy, with 65.6 per cent of freelancers selecting it.

Previously, in Q4 2020, only SOC2 professional freelancers had cited government regulation relating to hiring freelancers in the top three factors adversely affecting their business performance and now rank this factor as second in Q1 2021. The fact that we now see SOC1 managerial freelancers citing this as the top factor, with 82.9 per cent agreeing, shows that the IR35 changes and the question of how to continue securing contracts ‘outside IR35’ are growing and significant concerns for the sector.

For SOC2 professional freelancers, the top factor this quarter was government tax policy relating to freelancing with 87.9 per cent blaming this for their lack of confidence (a small increase from 83.3 per cent in Q4 2020). SOC1 managerial freelancers, also pessimistic about the outlook for their businesses, ranked government tax policy relating to freelancing (82.1%) as the second most significant factor negatively affecting their business.

The coronavirus pandemic has ranked as one of the overall top three factors adversely impacting business performance since the pandemic began in the UK in 2020. The fact that it fails to rank in the overall top three for this quarter demonstrates that concerns around the impact of the pandemic on freelancers’ businesses are dissipating. This may be because of the successful vaccine roll-out, government announcements on further economic support for the newly self-employed and the roadmap for lifting restrictions; but it may also be because other factors to do with regulations, taxation and the economy are now causing greater concern.

For SOC3 associate professionals and technical freelancers, however, the coronavirus pandemic remains the second most detrimental factor with 64.0 per cent agreeing, highlighting the sustained and damaging impact of lockdown restrictions, particularly for those operating as sole traders.

Turning to the positive influences on freelancers’ business performance, the top three factors remain unchanged from previous quarters. While all the negative factors impacting freelancers’ business performance were external, the factors enhancing freelancers’ business performance remain largely internal. The importance of building a brand and reputation is still viewed as the most important factor and the increase from 58.1 per cent last quarter to 60.8 per cent in Q1 2021 arguably underlines how freelance businesses have continued to operate throughout the pandemic, relying on reputation and brand to secure contracts. The second factor most positively affecting business performance was innovation in terms of the services offered to clients with 51.9 per cent agreeing. This was followed by organisations adopting flexible working practices (50.9%) which was particularly important for SOC2 professional freelancers, who ranked it as the second most significant factor (58.1%). SOC1 managerial freelancers and SOC3 associate and professional freelancers also reported that targeting new markets was the second and third most enhancing factor respectively. These SOC groups may see the targeting of new markets as particularly important because of the impact of the pandemic in working practices, driving the need for them to adapt.

Overall, we can see that the success of freelancers' businesses is largely attributed to adopting the right business strategies. The top two positive factors freelancers cited were to do with their strategies, while the third is how organisations have been able to evolve with the pandemic and adopt remote working practices.

Against the backdrop of the government announcing the roadmap out of restrictions, the successful roll-out of Covid-19 vaccinations in the UK and the Chancellor announcing that economic support will continue until September for those eligible, it could be expected that confidence would increase. In fact, the scores for three-month and 12-month confidence reached their highest levels since 2015, far surpassing expectations and showing that freelancers are confident in the UK’s economic growth and recovery. The average three-month confidence in the UK economy significantly increased from -27.8 in Q4 2020 to -4.3 this quarter, returning to levels of confidence not seen since the Confidence Index’s last positive score back in Q4 2015.

SOC3 associate professional and technical freelancers saw the biggest increase – from -24.5 in Q4 2020 to 6.7 this quarter: the highest figure ever recorded for this group since the Confidence Index began in 2014. With SOC3 associate professional and technical freelancers more likely to be sole traders and thus not affected by the IR35 changes, this significant increase could be ascribed to the roll-out of vaccinations and the prospect of restrictions being gradually lifted throughout the next three months.

Increases in SOC1 managerial and SOC2 professional freelancers’ confidence in the UK economy for the next three months reinforces the notion that, despite the threat of IR35 changing how clients engage with contractors, the situation in the next three months may not be as difficult as anticipated in Q4 2020. Nevertheless, these two groups remain in negative territory with SOC1 managerial at -15.4 and SOC2 professional freelancers at -8.7 despite an increase from -35.4 and -22.0 in Q4 2020 respectively.

Freelancers’ confidence in the UK economy closely aligns with other recent research which found that in Q1 2021, confidence in a rapid economic rebound was growing, with Britain enjoying its strongest quarter for stock market floats in fourteen years and more households now believing their finances will improve over the coming year.2

There is an almost identical picture when looking at freelancers’ confidence in the UK economy over the next 12 months. Again, there was a sharp increase in average confidence – rising from -27.7 in Q4 2020 to -0.2 this quarter and, like the three-month outlook, now representing the highest score since 2015. This increase in confidence in the UK economy is felt by all three freelancer groups. SOC3 associate professional and technical freelancers have the highest levels of confidence in the UK economy over the next 12 months, with an index score of 11.3, the highest score since the establishment of the Confidence Index in 2014. The rise from -27.7 in Q4 2020 to 11.3 this quarter for SOC3 associate professional and technical freelancers is closely followed by SOC2 professional freelancers reporting an increase from -32.3 to -2.0, which likewise represents the highest score for this SOC group since 2015. On the other hand, SOC1 managerial freelancers reported a much smaller increase from -21.0 in Q4 2020 to -15.8 this quarter. This negative confidence index score ultimately offsets the positivity forecast by SOC3 associate professional and technical freelancers to return a negative overall average score for this quarter. Yet, the significant increase in this index score demonstrates the increased confidence that freelancers have in the UK economy over the next 12 months and with restrictions due to be further lifted, we should see more increases in confidence as the UK economy seeks to recover from the pandemic.

Freelancers’ day rates have increased by eight per cent in the first quarter of 2021. Average day rates now stand at their highest level since 2019 and this increase largely reverses the slump in day rates seen throughout the pandemic. This is due to all three SOC groups experiencing increases from the previous quarter for the first time since Q4 2018. In fact, SOC1 managerial freelancers saw an increase from £526 in Q4 2020 to £579 this quarter, while SOC2 professional and SOC3 associate professional and technical freelancers saw increases from £529 and £232 to £546 and £268 respectively over the same period.

Sadly, with the increased competition expected because of the IR35 changes (as contractors seek a diminishing number of ‘outside’ status contracts), the day rates for SOC1 managerial and SOC2 professional freelancers are likely to fall as prices are slashed in a bid to secure contracts.

Looking ahead to the next 12 months, only a minority (39%) expect that their day rates will increase. A further half expect a decrease, which follows the trend in negative expectations consistently reported since Q2 2019. Overall, it is expected that over the next 12 months, day rates will decrease by an average of 6.2 per cent.

The SOC1 and SOC2 freelancers’ concerns about the IR35 reforms and their impact on the hiring market may explain the negative expected change in their day rates. This is because both SOC groups predict greater competition and thus lower day rates as ‘outside’ IR35 status contracts diminish in availability. In fact, SOC2 professional freelancers were predicting the worst drop, with an expected decrease of -12.0 per cent over the next 12 months, while SOC1 managerial freelancers expected a drop of 8.0 per cent. SOC3 associate professional and technical freelancers actually reported a positive expected change of 0.2 per cent, the first positive expectation from this group since Q2 2019 and again highlighting this group’s growing confidence.

In our last quarterly report in Q4 2020, we observed that freelancers were working more for less; the fact we now see freelancers earning more and working more is encouraging and reverses this trend. We measure freelancer spare capacity through the number of weeks without work per quarter out of a maximum of 13. Spare capacity has fallen slightly from 4.3 in Q4 2020 to 3.7 weeks this quarter, meaning that freelancers were working 72 per cent of the time. Therefore, we can see that in terms of business volume, freelancers have experienced an overall increase since the last quarter and continued the trend of decreasing spare capacity since the peak of 5.5 weeks in Q2 2020.

We can point to factors enhancing business performance such as brand reputation and value, innovation in services provided and adoption of remote working as driving this increase in business volume as freelancers learnt to adapt to the coronavirus restrictions. All three freelancer groups have seen drops in spare capacity, with SOC1 managerial freelancers seeing a decrease from 5.7 weeks in Q4 2020 to 4.4 weeks this quarter. SOC2 professional freelancers saw a decrease in spare capacity from 3.8 weeks in Q4 2020 to 3.2 this quarter, representing the lowest across all three groups. SOC3 associate professional and technical freelancers also saw a decrease in spare capacity from 3.9 weeks in Q4 2020 to 3.7 for this quarter.

Despite the overall fall in spare capacity this quarter, it still remains higher than pre-pandemic levels, but it is important to remember that freelancers were still contending with lockdown restrictions at the time of the survey.

Freelancers’ quarterly earnings increased by 20 per cent since Q4 2020 and now stand at £20,778 which is their highest level since Q1 2020. This return to pre-pandemic levels for quarterly earnings now means that freelancers’ earnings are over double those of equivalent employees in 2020. The £20,778 average quarterly earnings figure closely matches the same quarter in 2020 where average quarterly earnings were at £20,821. This is encouraging news for a sector that is seeking to recover from the pandemic’s impact on their earnings, which at the peak of the pandemic in Q2 2020 dropped to a record low of £15,709.

SOC3 associate professional and technical professional freelancers saw the biggest increase in earnings between Q4 2020 and Q1 2021 with an increase of 29 per cent, whilst SOC1 managerial and SOC2 professional freelancers experienced increases of 24 per cent and 14 per cent respectively between the same quarters. This sharp increase in SOC3 associate professional and technical professional freelancers is also likely the driving factor behind their substantial increases in confidence in economic performance.

With all three groups experiencing increases in average quarterly earnings, it is interesting that this has failed to translate into increased confidence in their own freelance businesses.

The majority of freelancers (67%) expect business costs to increase compared to just 14 per cent who expect a decrease in input costs over the next 12 months. Indeed, freelancers are forecasting an average increase of 7.4 per cent in input costs over the next 12 months. This increase in expected business costs is likely linked to the reopening of the economy as restrictions are eased and the associated coronavirus compliance costs that may be required to open and operate businesses. It may also be partly due to freelancers who trade in the European Union expecting rising costs because of the increased documentation and border checks between the UK and the EU after Brexit.

In addition, SOC1 managerial freelancers and SOC2 professional freelancers also anticipate increases in business costs of 3.7 and 7.7 per cent respectively. With these groups more likely to be affected by the IR35 changes, the potential costs involved in working through an umbrella company or paying Employers National Insurance contributions if determined to be ‘inside’ IR35, may also explain the expected increase in costs.

Overall, in terms of input costs to their businesses, freelancers are expecting significant inflation and tighter profit margins, which largely explains why confidence in freelancers’ own businesses remained stagnant while confidence in the UK economy increased significantly. The 7.4 per cent increase in input costs is over ten times the latest inflation rate (0.7%)3 and all three SOC groups are expecting business costs to exceed the current inflation rate.

We began tracking business debt in Q3 2019 as part of the Confidence Index. The results reveal that in Q1 2021, more than a quarter of freelancers (27%) are now incurring business debt, an increase of five percentage points from Q4 2019 and a two percentage point increase from Q4 2020. In particular, freelancer debt accrued via business loans from commercial banks has seen the largest increase – an increase of eight percentage points since Q4 2019. Similarly, although credit cards issued in the name of self-employed businesses have fallen from 18 per cent in Q4 2019 to 16 per cent this quarter, we’ve seen an increase from one per cent to four per cent in the number of loans taken from government agencies over the same period. A key factor in this is the introduction of the government Bounce Back Loan Scheme.

Similarly, although we saw a spike in freelancers taking out business loans from friends or family in Q1 and Q4 2020, at five per cent and four per cent respectively, this has now decreased to just two per cent as the pandemic’s impact begins to ease. Overall, the fact that we’ve seen an increase of five percentage points in business debt from Q4 2019 to this quarter, demonstrates the significant burden that’s been placed on freelancers as they attempted to curtail the impact of the pandemic.

We know from previous research that stress levels among freelancers increased during the pandemic. In fact, 32 per cent of respondents reported that their stress levels were high (8-10 on a 10-point scale where 10 is high) in June/July 2020 and respondents operating through a limited company (35%) were significantly more likely to report high levels of stress compared to those operating as sole traders (26%).4 

Looking at this quarter, job-related stress levels have fallen from an average of 6.00 in Q4 2020 to 5.77 in Q1 2021 (on a 10-point scale where 0 is not at all stressed and 10 is extremely stressed) and continues on a declining trend since a peak of 6.63 in Q1 2020. This decrease is largely driven by the drop in SOC3 associate professional and technical freelancers’ stress levels, with a fall from 5.98 in Q4 2020 to 5.19 this quarter. This drop could partially be explained by the Chancellor’s announcement that economic support will continue until September 2021 with SOC3 associate professional and technical freelancers most likely to be able to access the Self-Employed Income Support Scheme (SEISS) grant payments. 

On the contrary, SOC1 managerial freelancers saw an increase in job-related stress levels, rising from 6.10 in Q4 2020 to 6.72 this quarter. This increase in stress from SOC1 managerial freelancers, the highest recorded since 2019, could be attributed to the upcoming IR35 changes and how they may impact on contract complexity.

Job satisfaction has increased from an average of 5.45 in Q4 2020 to an average of 5.88 (on a 10-point scale where 0 is not at all satisfied and 10 is extremely satisfied), an increase of eight per cent. With increases across all three SOC groups since Q4 2020 and since the same quarter in 2020, freelancers are now enjoying greater levels of job satisfaction. SOC1 managerial freelancers saw the highest increase in job satisfaction from 4.96 in Q4 2020 to 5.58 this quarter, bringing satisfaction levels back to pre-pandemic levels; this could be partially attributed to their ability to successfully adapt to remote working practices. Similarly, SOC2 professional freelancers and SOC3 associate professional and technical freelancers also saw increases of eight per cent and seven per cent respectively.

It is clear however from SOC1 managerial freelancers, that increased job-related stress levels fail to directly correlate into worsened job satisfaction as satisfaction actually increased by 13 per cent from the last quarter despite job-related stress levels continuing to rise.

However, the average job satisfaction of 5.88 remains short of the pre-pandemic levels of 6.03 and 6.14 for Q3 and Q4 2019 respectively. Yet again, with lockdown restrictions due to be gradually eased further in the next quarter, we should see job satisfaction increase in Q2 2021.

This quarter, the freelance sector saw a remarkable recovery to pre-pandemic levels of earnings and also confidence in the UK economy. Although their spare capacity has not yet quite returned to pre-pandemic levels, freelancers compensated with an increase in day rates to well above the level immediately preceding the pandemic.

The only key area where there has not been a significant increase is freelancers’ confidence in their own businesses. This is concerning and a distinct reversal of the historical trend: in fact it is the first time since the beginning of the Confidence Index when freelancers have had less confidence in their businesses than in the wider UK economy. While freelancers’ confidence in the economy hit levels not seen since before the EU referendum – almost certainly as a result of the roadmap to recovery – their short-term business confidence actually fell compared to the previous quarter.

The sharp disparity is likely to be because of the coincidence of the opening up of the economy with the changes to IR35 self-employed taxation regulations. As has been widely reported, these rules, which directly affect the freelancer hiring market and came into force in early April 2021, have caused dismay in the sector. This is reflected in the fact that freelancers cited government regulations relating to hiring and government tax regulations as the two main factors negatively affecting their business.

Freelancers have historically played a significant role in economic recoveries, with the number of self-employed people sharply rising and boosting overall employment in the wake of the 2008 financial crisis, for example. There is now an open question – reflected in the results of the Confidence Index – about whether, given the changes to taxation and hiring regulations, freelancers will be able to play this role in the wake of the pandemic financial crisis. At present, all that is clear is that freelancers’ confidence in their businesses is now not rising in-line with other metrics. If this continues in the next Confidence Index, this may be a sign that the changes have structurally impeded the sector from both driving and benefiting from any economic ‘rebound effect’ after the pandemic.