Freelancers cut their pay by £48 as IR35 bites, and work grows scarcer

Freelancers resorted to voluntarily slashing their own rates of pay, simply to secure enough work between April and June.

Despite self-employed veterans traditionally warning against self-imposed rate reductions, average pay for freelancers fell over the period by £48 – on average.

The Association of Independent Professionals and the Self-Employed (IPSE), which uncovered the day rate drop in its latest confidence index, largely blamed the earnings fall on IR35 reform.

'Pre-pandemic levels'

Since April 6th, engagers of freelancers have had to decide the IR35 status of such off-payroll workers who operate via limited companies, and if engagers get it wrong, they risk owing tax and penalties to HMRC.

Many affected businesses (mid-sized and large companies) have therefore simply stopped offering freelance contracts, serving to narrow the pool of opportunities available to the self-employed.

At the same time, volumes of work for independent workers are still not back to “pre-pandemic levels,” said IPSE, meaning coronavirus restrictions continue to prevent outfits from operating and hiring at fully capacity.

'Undercut the competition'

But as well as covid measures, and bans on incorporated business suppliers because of IR35, there is a further narrowing of the contracts pool stemming from April’s reformed off-payroll rules.

And this additional IR35 effect is also cutting into freelancers’ take-home pay – down quarterly by £2,126, the association found.

“A significant proportion of clients are simply scrapping their contractor workforce…leading to [freelance] contractors slashing their own rates to undercut the competition and make sure they secure work,” IPSE’s Andy Chamberlian began in a statement to FreelanceUK.

“[But also] many freelancers are now having to work inside IR35 or through umbrella companies, and in each case, the rate they are paid will be reduced.”

'Clients now hold all the cards'

Mr Chamberlain explained that where individuals get asked to work through an umbrella company, even though their assignment rate may be the same, their take-home will be lower because the umbrella company takes a fee.

Reminded that in some sectors, agencies simply advertise a role with a rate and the worker either goes forward or doesn’t if the rate is too low, IPSE’s policy director suggested that, for many freelancers, it might no longer be as simple.

“Certainly, many clients advertise a rate, but in practice it is almost always a negotiation,” he said. “And with more competition for fewer engagements, the clients now [hold] all the cards.”

'Optimistic about rates in the future'

Despite the rate cuts, which IPSE found positions daily pay for freelancers to be at its lowest level since 2018, there is a paradox.

Respondents to the index predicted their pay should actually increase by 8.7 per cent over the next 12 months.

Less positively, 68 per cent forecasted their own costs as a one-person business to rise too, yet as a whole, freelancers' confidence in their own business is up both in the short term, and in long term (next 12 months’ outlook) -- where it rose to its highest level since 2015.

“It’s hard to say exactly why freelancers are optimistic about their rates in future,” said IPSE’s Mr Chamberlain, responding to questions yesterday.

“There are two likely factors: it could be general surging optimism about the economy and it could also be an anticipation that the initial chaos after the IR35 changes will settle and clients will once again engage contractors outside IR35 – particularly as they seek flexible expertise to build back from the recession.”

'Look at alternatives before cutting your rate'

But for now, rates are convincingly down – although whether cutting their own pay is a response to fewer contracts that other self-employed sole traders should follow suit with is in doubt.

“We would advise freelancers to look at alternatives first, [before they reduce their rate],” Mr Chamberlian advised.

“[Such as] making sure they are marketing themselves as effectively as they can, and ensuring they have the skills to compete in the modern market.”