The coronavirus pandemic has thrown a spotlight on the armies of self-employed freelancers, consultants and contractors who collectively ensure the UK's economy remains one of the most flexible in the world. Comprising just over five million people, some 15 per cent of the working population, this group contributes a combined £305bn to the UK economy.1 The resilience and adaptability shown by this workforce since the start of the pandemic has been truly remarkable. But it has not been without cost. This report, published with IPSE, sheds light on how the pandemic has affected their business and their personal lives.

This report should be used as a tool to help us understand the specific ways in which we can support the self-employed, as they attempt to repair the financial damage that has been created by this pandemic. More than ever, Starling is listening to its business customers and accelerating its efforts to look for ways to help them get back on their feet and navigate through this period. And as a business owner myself, I know first-hand how much strain the coronavirus pandemic has put on self-employed people, and the many tough decisions that have needed to be made to keep finances afloat. So, it’s imperative that we lend them a listening ear.

Our report found that freelancers’ household income was negatively impacted because of reduced working hours - leaving many with no choice but to use their savings to cover living costs. Women, younger and lower paid freelancers felt the full force of this pandemic as they were amongst the groups that have suffered the most mentally and financially. Frequent late payments from clients put them in the position of not having enough finances to cover work-related or even basic living expenses.

The financial burden of this has not only impacted their businesses, but also their mental health as the women we spoke to reported feeling stressed or anxious, and even lost many hours of sleep due to late payments. Across the board many of the freelancers we heard from said that late payment had a negative impact on their ability to work, as they felt less productive or were unable to concentrate. And some even started experiencing a lack of confidence.

This report has uncovered many issues for the self-employed workforce that have either been a direct result of the pandemic or have been exacerbated by it. Regardless, as 2020 draws to a close, we know now more than ever that more needs to be done to support the self-employed. Despite this pandemic being very challenging for them it has highlighted that they are key members of British society. So, it’s time that we showed how much we value them. 

Anne Boden
Founder and CEO of Starling Bank

The lockdown and the other circumstances of the pandemic have led to a freelancer financial crisis. Many freelancers are missing out on support, struggling with increasing levels of late payment and burning through their savings to get by. This has severe consequences not only for their financial futures, but also for their mental health and wellbeing.

Worryingly, it seems that the most severe financial crisis is among more vulnerable groups including younger freelancers and those with lower incomes. The crisis also seems to be affecting female freelancers more than men.

Previous research by IPSE showed that the average freelancer has seen a 31 per cent drop in income since last year. However, of those surveyed for this research, over half (56%) said they had not accessed government support – either because they could not or for a range of other reasons.

Many freelancers’ financial situations also seem to have worsened because of an increase in the prevalence of late payment. This is not a new issue with over half of freelancers (56%) saying they have experienced late payment at some point in their career. However, since the pandemic began, over a third (36%) say late payments are becoming more common, leaving even more freelancers financially insecure.  Late payment has done significant financial harm to many self-employed people during the pandemic. Almost a quarter of freelancers who had been paid late (23%) said they used up most or all of their savings as a result, while a fifth (22%) had to resort to credit cards or overdrafts to get by. Worryingly, 17 per cent of freelancers said late payment left them without enough money to cover work expenses and one in six (15%) said they did not have enough to cover living costs. Women, younger and lower paid freelancers were more likely to be in both of these situations.

Late payment is also having a significant impact on mental health. Half (48%) of freelancers who were paid late said they were left feeling stressed or anxious and a third (31%) said they lost sleep over it. Female freelancers were more likely than men to report late payment having a negative impact on their mental health.

As a result of these difficult financial circumstances – fueled by the coronavirus and a rise in instances of late payments – a quarter of freelancers (27%) have burned through most or all of their savings to get by. Just under a quarter (23%) said they had used credit cards to support themselves, while a fifth (20%) took money out of their businesses and one in seven (14%) used their overdrafts. One in ten even had to borrow from friends and family (11%) or sell items they owned (10%).

Women, younger and lower paid freelancers were all more likely to have borrowed money from family and friends. Women and younger freelancers were also more likely to have sold items to support themselves. Younger freelancers were more likely, too, to have used most or all of their savings to get by.

These financial difficulties are likely to lead to ongoing problems for many freelancers – in particular when they face their next tax return. Although almost half (47%) said they have been putting money aside throughout the year to prepare for their tax return, nearly a fifth (18%) said they will have to borrow money to pay their taxes, while one in seven (14%) have not started saving to pay their taxes and will start closer to the deadline. 

To understand the gaps in support and freelancers’ deteriorating financial circumstances, IPSE and Starling Bank have collaborated on a dedicated piece of research examining freelancers’ finances throughout the coronavirus pandemic. The following report focuses on some of the key factors impacting freelancers’ work-related and personal finances. These include their experiences with late payment and completing their tax returns before and since the beginning of the pandemic, as well as accessing financial support from both government and financial institutions over the course of the pandemic.

The report concludes with a series of recommendations for both industry and policymakers on the areas where there is a need for more information and support for freelancers.

The impact of the coronavirus pandemic on freelancers

The coronavirus pandemic has had a profound impact not only on people’s health but also on their income, savings and overall financial circumstances.

According to official data from the Office for National Statistics (ONS), one in four (26%) people in employment reported reduced income as a result of the crisis in May. By the end of July, around one in three people reported that they were unable to save for the year ahead (36%) and would be unable to pay for an unexpected but necessary expense (33%). Furthermore, one in eight (13%) said they had to borrow money or use credit more since the beginning of the crisis.[2]

Data looking at March and April 2020, when a nationwide lockdown was in place, reveals that one group - the self-employed - were particularly affected. The self-employed were more likely to have had their household finances and their jobs negatively impacted due to the coronavirus (COVID-19), through reduced income and reduced working hours, having to use savings to cover living costs and being unable to save for the future.[3]

This is concerning because close to 5 million people in the UK were self-employed at the end of 2019, making up 15 per cent of the overall UK workforce and contributing an estimated £305 million to the economy.[4] Because of the pandemic, however, the number of self-employed people decreased substantially to 4.56 million in September 2020, marking a drop of 240,000 in the third quarter of the year (June-August).[5]

IPSE’s own research showed that the vast majority (91%) of freelancers (those self-employed who work in the top three most highly skilled Standard Occupational Categories (SOCs1-3)) were concerned about the financial impact of coronavirus on them and their self-employed businesses in March.

Alarmingly, almost half (45%) also said that they were likely to find themselves with no money to cover basic living expenses such as rent and bills, and 68 per cent said they were at risk of losing all or most of their savings.[6] IPSE’s recent Confidence Index report for Q2 2020 (April-June) also shows that freelancers experienced a 25 per cent drop in their average earnings for that quarter.[7]

Freelancers operate in an already difficult financial situation

The coronavirus crisis seems to have exacerbated the already difficult financial situation freelancers operate in. Research by IPSE conducted prior to the pandemic found that nine in ten self-employed people worry – at least occasionally – about their financial situation, while more than three quarters (77%) are concerned that the money they have – or are going to save – won’t last.[8]

Furthermore, the main things that concerned freelancers in their self-employed work, prior to the pandemic, were all to do with their finances. These included the irregularity of income (60%), not being financially prepared for retirement (56%) and not being paid on time by a client (46%).[9]

Late payment detrimental to financial wellbeing

When surveyed in November 2019, 60 per cent of self-employed people said they had experienced a delay in payment from a client, while half had completed work they were never paid for at all.[10]

Existing evidence on the issue has also shown that late payment is widespread among small businesses and the self-employed in particular, with SMEs being owed £23.4bn in overdue invoices and creative industry freelancers losing an average of £5,400 a year through unpaid work.[11]

To ensure fair pay practices in the UK, the government established the office of the Small Business Commissioner (SBC) in 2016 – an independent public body dedicated to tackling late payment. However, to date this has not been successful in shifting the poor payment culture.

More recently, in October 2020, the government said it will be consulting on plans to give the SBC more powers to resolve late payment issues, including the ability to launch investigations, impose fines and address ‘small business to small business’ complaints.[12]

Financial wellbeing can directly impact mental health

Increasingly difficult financial situations are also likely to have a direct impact on the mental health and wellbeing of freelancers. Research by the Mental Health Foundation shows that people living in financial hardship are at increased risk of mental health problems and lower mental wellbeing.[13]  This was supported by IPSE’s recent research showing that before the pandemic, two-thirds (68%) of freelancers said they had “good” or “excellent” mental health, however because of the coronavirus crisis, this fell by 43 per cent to just over a third (39%).[14]

Government support during the coronavirus crisis

To improve the situation for freelancers throughout the pandemic, the government has introduced a range of support measures for the self-employed, including the Self-Employment Income Support Scheme (SEISS), the postponement of changes to IR35 regulations, bounce back loans and deferred VAT payments.

The government also gave freelancers the option to defer their self-assessment tax payments from 31 July 2020 as normal to 31 January 2021. In September 2020, the Chancellor further announced that delayed self-assessment payments can be paid back over an 11-month interest-free period for those owing up to £30,000, which can be organised through the ‘Time to Pay’ facility.

However, many self-employed people have fallen through the gaps and have been left with little or no support. The SEISS, which initially provided the self-employed with a taxable grant based on 80 per cent of their average monthly profits to a maximum of £2,500 per month, was not available to those new to self-employment, those with annual profits over £50,000, and those who are limited company directors.

This means that while there were close to 5 million self-employed individuals in the UK, only 3.4 million of them were found to be potentially eligible for the SEIS scheme and 1.6 million were found to be ineligible,[15] including approximately 710,000 directors of limited companies.

According to the Prompt Payment Code, which sets the gold standard in payment terms and is now under the office of the SBC, all signatories of the code should pay suppliers within a maximum of 60 days, in line with late payment legislation requirements.[22]

However, there have been numerous suggestions that the target for prompt payment terms should be brought down from 60 days to 30, and signatories of the Prompt Payment Code are currently encouraged to work towards adopting 30 days as the norm.

Furthermore, too often customers abuse their supply chain with unnecessarily long payment terms and there is an indication that this has become more severe since the beginning of the pandemic. For instance, FSB found that one in ten (10%) of all small businesses have experienced a lengthening of payment terms from customers as a result of COVID-19.[23]

Looking at our data, on average, freelancers usually wait 32 days to receive a payment from a client (slightly over the advised 30 days), with 40 per cent usually getting paid within the first 15 days.

However, over a fifth (22%) usually have to wait more than the advised 30 days, and a significant proportion – one in seven (15%) – usually have to wait more than 59 days to receive payment for the work they have completed.

To follow up on instances of late payment, freelancers also spend a significant amount of time and resources every year chasing unpaid invoices. Previous IPSE research showed that this was the case even when freelancers are taking time off, with over a fifth (21%) chasing invoices for late payment when they were on holiday.[24]
The data shows that, on average, freelancers spent 12 hours in the last year chasing invoices for late payment.

This means that on average freelancers from the highest earning group can end up losing over £1,000 a year as a result of time spent chasing invoices for late payment instead of working.

Therefore, freelancers end up losing not only a substantial amount of time as a result of late payment but also money.

Freelancers who experienced late payment are currently owed an average of £5,140 for the work they have completed, with single payments owed going up to £55,000. Men (£6,816), limited company directors (£7,958) and those in the highest earning brackets (£10,985 for those earning over £500 a day) were owed the highest amounts of money as a result of late payment.

Over half (60%) of the freelancers surveyed said they were asked to complete work for free to gain skills, exposure or industry experience whilst self-employed (Figure 3).

Looking at our data, the largest proportion (36%) of freelancers were asked to complete work for free up to five times in their self-employed career. However, one in eight (13%) were asked to do so between five and ten times, and one in ten (10%) were asked more than ten times.

Women, younger freelancers, sole traders and those earning lower day rates were most likely to have been asked to complete work for free.

This is in line with previous IPSE research revealing the disproportionate effect of unpaid work on women and younger freelancers.[25]

Significantly, it is among the younger age groups where there are higher rates of doing unpaid work voluntarily to further their skills.[26] This is concerning, considering that research in the creative sector has found almost half (45%) of freelancers did not have enough money to cover work-related costs, while four in ten could not cover basic living expenses (e.g. rent, bills) as a result of doing unpaid work.[27]

All freelancers are required to file a self-assessment tax return each year and pay tax on their income, regardless of whether they operate as a sole trader or a limited company. Previous IPSE research showed that on average self-employed people spend 79 hours a year on completing their annual tax return.[33]

This is undoubtedly one of the most important financial responsibilities for all those working for themselves, even now, when they are facing significant financial difficulties as a result of the coronavirus crisis.

As mentioned earlier in the report, the government gave freelancers the option to defer their self-assessment tax payment from 31 July 2020 as normal, to 31 January 2021 in order to limit the financial impact of the coronavirus crisis on the sector.

In September 2020, the Chancellor further announced that delayed self-assessment payments can be paid back over an 11-month interest-free period (for those owing up to £30,000), which can be organised through the ‘Time to Pay’ facility.

The most popular strategies freelancers used to save/access money for their tax return before the coronavirus crisis included putting money aside on a regular basis throughout the year (34%) and putting money aside when they receive a payment from a client (32%).

While some people seem to have been well prepared for their tax return, others mentioned putting money aside in the last few months before the deadline (13%) or withdrawing money from their savings account (13%) as a key strategy.

Younger and lower paid freelancers were less likely to save money for their tax return throughout the year or after they received a payment in comparison with older and higher paid freelancers, meaning it’s likely these groups were less prepared for their tax return before the coronavirus crisis.

Looking at levels of preparation for their next tax return, almost half (47%) of freelancers said that they have been putting money aside throughout the year to prepare for their next tax return – when surveyed in September 2020. However, not all freelancers seem equally prepared for the future.

A small but significant proportion – one in seven (14%) – said that they will start saving money closer to their tax return deadline. Close to a fifth (18%) also said they will have to borrow money in some shape or form to prepare for their next tax return.

Groups most likely to have been putting money aside throughout the year included men (52%), those over 55 (54%), limited company directors (53%) and higher earners (58% of those earning over £500 a day).

Women (22%) and younger freelancers (21% of those aged 16-34) were significantly more likely to say they will start saving for their next tax return closer to the deadline in comparison with men (10%) and older freelancers (10% of those over 55), indicating that these groups may face more difficult financial situations in the coming months as a second wave is spreading across the country.

Therefore, while some freelancers are prepared for paying their next tax return in July 2021, a significant proportion indicate they will face significant difficulties in doing so.

This report has shown that freelancers’ financial situations have been continuously deteriorating since the coronavirus outbreak in February 2020, and there are many factors contributing to this.

Over a third (36%) of freelancers said that instances of late payment have increased since the beginning of the coronavirus crisis and those of them who had experienced late payment are currently owed an average of £5,140 for the work they have completed.

Late payment is not the only factor contributing to the poor financial wellbeing of freelancers during the crisis.

Over half (56%) of the freelancers surveyed did not access any of the government schemes introduced to support the self-employed, and a significant proportion of those surveyed have used most or all of their savings (27%) or credit cards (23%) to support their financial situation. Finally, close to a fifth (18%) said they will have to borrow money in some shape or form to prepare for their next tax return.

There are a lot of things that government, industry and support organisations such as IPSE can do to improve freelancers’ financial circumstances, especially now during the coronavirus crisis, and these are outlined fully in the recommendations section below.

Make COVID support for the self-employed flexible and fair to continue to support individuals who are in need and cover groups who fell through the gaps.

The SEISS has provided vital support to over 2.6 million self-employed people34 but many have fallen through the gaps. As COVID cases rise and we find ourselves in a second national lockdown, it is vital people are supported through the coming months. It’s welcome that the government has raised SEISS to 80 per cent of income again to match the furlough scheme. However, there are still deep structural problems with the scheme, which the government must urgently address. Government should make self-employment support more fair by expanding support to those groups who have fallen through the gaps.

Give the Small Business Commissioner more powers to tackle late payment, including the ability to launch investigations, impose fines and address ‘small business to small business’ complaints.

The creation of the Small Business Commissioner in 2016 was an important reform in improving the UK’s prompt payment culture. However, with so many freelancers still experiencing late payment, the role must be enhanced if it is to make a difference.

The SBC should be given more resources and powers of enforcement – specifically so that the Commissioner can levy fines on companies that are persistent late payers. The SBC’s remit should also be expanded so that it can consider complaints from small businesses, such as the self-employed, about other small businesses who do not pay on time. This would help improve payment practices throughout all business and not just the larger companies, who many freelancers do not work with.

Government and industry should raise awareness of businesses’ late payment rights and promote practical steps individuals can adopt to reduce late payment.

Often one of the biggest factors leading to late payment is that those who are owed money either do not know what their rights are and the appropriate steps to claiming money back; or they are too fearful of jeopardising their commercial relationships by appearing to be ‘difficult’ chasing up late pay.

Raising awareness of existing rights, particularly the ability to charge interest on late payments and contact the Commissioner’s office to raise complaints, could stimulate an improvement in payment culture. Government, led by the SBC, should lead a public information campaign on this. IPSE, along with other organisations and businesses supporting the self-employed, would be willing to work with the Commissioner to promote this campaign.

Commission a fundamental review of the UK’s tax system and how it affects small businesses and the self-employed, to make it easier for them to file returns.

Too much of freelancers’ time is taken up with unnecessary financial struggles like determining their tax status or navigating the self-assessment process. Government should strive to make life as easy as possible for the self-employed and avoid creating new barriers to them running their businesses.

Self-employment has grown in recent years, but the UK’s tax system and financial institutions have not kept up with the pace of change. The complex tax system is out of date and penalises the self-employed: the government should conduct a full, wide-ranging review of self-employed and small business taxation to unleash the UK’s entrepreneurial spirit and make it easier for self-employed people to file returns, whether they are sole traders or company directors.