How much do sovereign professionals earn?

Understanding the earnings of sovereign professionals (in the UK) is more difficult than it might first appear. This report from the Office of National Statistics (Trends in self-employment in the UK) makes a good stab and much of the data below comes from that report. However, it is necessarily flawed and, I would argue, most likely understated, especially for full-time self-employed.

How to define self-employed

The problem lies in legal status and the way that income is taxed. In the UK, if you are a sole trader, then you trade on your own account. You bill your services as, say, John Smith, Plumber. That income less your business expenses is subject to income tax (ignoring national insurance, another form of employment tax, for simplicity).

However, there is another option. you can incorporate a limited company and trade through that. The limited company has its own legal identity and the profits it makes belong to it (and its shareholders). You can then take your share of profits as a dividend on the shares you own and/or the company can hire you as an employee and pay you a salary. Both dividend and salary are subject to taxes, but the rules are different and the net effect can be different, too. It’s often more tax-efficient to use a limited company structure (though less so than it used to be).

There are other reasons, too. Many people like the clear separation between business and personal. Being Director / Managing Director / CEO of ABC Ltd. can appear more senior and lend gravitas to a business card. It can also signal, perhaps, greater seriousness or commitment to the business. These things  can be illusory, but effective. Perversely, a limited company (by definition, limited in its liability) can find it easier to obtain business loans than a sole trader (who is liable to the full extent of their personal worth).

In the business-to-business (B2B) market (e.g. independent consultants, designers, interim managers etc.) and especially at the more expensive or senior end, the limited company model is (I would suggest)  much more common than the sole trader. And, in any survey, the sole employee-director of a limited company will necessarily respond that he or she is most definitely NOT “self-employed”.

About the self-employed

All of that said, the ONS report throws up some interesting data.

Population

There are now 4.8 million self-employed people in the UK, 15.1% of the labour force and up from 3.3 million (12.0%) in 2001. And, more of those self-employed people are solo workers: 4.0 million in 2016, compared to 2.4 million in 2001.

Income

Median income for full-time self-employed in the financial year ending March 2016 was £347 per week (£18,044 pa).

Median incomes for the self-employed have not increased as much as those of employees or general inflation:

  • Increase for full-time male self-employed (2000-01 to 2015-16) = 22.8%
  • Increase for full-time male employee (2000-01 to 2015-16) = 44.8%
  • Increase for full-time female self-employed (2000-01 to 2015-16) = 22.9%
  • Increase for full-time female employee (2000-01 to 2015-16) = 52.8%
  • Cumulative inflation over the period = 51.8%

Education

Interestingly, the share of self-employed with degree-level (or higher) education has grown from just 19.3% in 2001 to nearly one third (32.6%) in 2016.

Degree-educated, self-employed people now make up 4.9% of the total (employed plus self-employed) labour force compared with just 2.3% in 2001. As the ONS report says:

Growth in self-employment has been driven mainly by those who have a degree (or equivalent), increasing its share amongst both the self-employed and total employment, showing that relatively highly-qualified individuals are becoming more concentrated in self-employment.

Wealth

In terms of property wealth, for the 35-54 year-old age bracket, 27.0% of self-employed have property worth over £250,000, compared to just 17.6% of employees.

For the over 55 age-group, the difference is even more marked: 56.2% of self-employed compared to just 37.5% of employees.

By contrast, the self-employed typically have much smaller pension pots.

Aged 35-54, just 14.0% of self-employed have a pension pot of £100,000 or more compared to 34.2% of employees. And, 45.1% have no pension provision (other than state pension) compared to just 16.4% of employees.

In the older age group, 34.8% of self-employed have a pot of £100,000 or more compared to 56.4% of employees. Nearly a third (30.3%) of 55+ years have zero pension provision compared to 14.2% of employees.

In terms of cash, the figures are neck and neck except for the two extremes of the 55+ age group, where the self-employed generally have greater cash wealth. There are fewer self-employed with less than £20,000 in cash assets (51.9% compared to 59.4% of employees) and more self-employed with greater than £100,000 in cash(19.4% compared to 12.2% of employees).

What about those limited companies?

Elsewhere, ONS data hints at possible growth in sovereign professionals operating through their own companies.

Between 2010 and 2017…

  • The number of micro-businesses (0-9 employees) has grown by 28.2%
  • The number of employees in those businesses has grown by only 18.9%, meaning the average 0-9 employee business is smaller.
  • In fact, the average employees per business has dropped from 2.5 in 2010 to 2.3 in 2017.
  • At the same time, the average revenue per employee has increased from £127.7k to £144.2k. Total revenue has increased by 34.2%.
  • By contrast, in the next band of 10-49 employees, number of businesses and number of employees have grown by around the same mount (17.9% and 17.6% respectively), while revenue has grown by only 12.3%.

In essence, there are more businesses of smaller size, generating income more effectively.

Given the wide bracket of 0-9 employees, that’s hardly definitive, but it is at least suggestive. The next task is to try and get more granular on size and on business sector.

In the meantime, I hope this is a useful summary for those interested in the world of sovereign professionals.

 

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The Gig Economy Data Hub

This looks interesting and useful.

The Gig Economy Data Hub aims to provide comprehensive information on all aspects of the gig economy.

The home page gets off to a great start:

A freelance graphic designer earns $25,000 for an ad campaign. A teacher drives for Uber on the weekends. An electrician owns and operates a successful small business. A stay-at-home mom sells Mary Kay cosmetics on Facebook. A recent immigrant cleans houses under the table. A retired woman knits hats to sell at craft fairs. What do these workers have in common?

There is more to what is currently called the gig economy than flavour-of-the-month media stories suggest.

The Data Hub is a collaboration between the Aspen Institute’s Future of Work Initiative and Cornell University’s ILR School. The data appears to be all US-focused, but the lessons and many of the findings will doubtless translate at least to the UK and possibly beyond.

 

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Serfs up – The Economist on the gig economy

The Economist has an article on freelancing: Serfs up – Worries about the rise of the gig economy are mostly overblown.

I have a couple of thoughts whenever this comes up.

‘Twas always thus

There has always been a freelance / independent / gig economy / zero-hours sector. Indeed, if you take a long view, it’s the 40 hour nine-to-five that’s the exception.

My early career was in the hotel industry, a sector that couldn’t exist without what we used to term “casual staff”. You need 20 waiting staff for a banquet on Saturday night, then maybe nothing for a week.

It was always a two-sided market. If the individuals involved were good – i.e. reliable, skilled, etc. – they moved up the mental list of who to call first. But, you had to treat them right, too. If you didn’t offer the going rate, you couldn’t get the staff. They would go and work for another venue.  Similarly, if you didn’t feed them well, messed them around or if their manager on the night was a buffoon, they wouldn’t work for you. That all seemed fair enough.

That’s not really dissimilar from the work I do, today. If I do a good job and provide a great service, I get invited back. If I messed up, the phone (or inbox) would go eerily quiet. Along the way, of course, I’ve “sacked” a few clients, too.

Coase was correct

Back in 1937, the economist Ronald Coase explained why firms exist. One of those things that no-one had thought to question before. It was, he realised, all down to transaction costs. Where work is regular, predictable and ongoing, it makes sense for two parties to enter into an employer-employee relationship. Where the requirement is more ad-hoc, the business finds a supplier and enters a purchase relationship.

The last decade has seen a dramatic drop in these transaction costs. Firstly, through the email and the web, more recently through the advent of platform companies.

In so many ways, nothing else is different. It’s simply that the break point (for both parties) is lower, making it easier for individuals and larger client organisations to transact lower-value projects or tasks.

The answer (to anything) is rarely more legislation

As The Economist concludes:

If the courts rule that vast swathes of gig workers are in fact employees, they could raise costs, killing innovation and hitting jobs. Yet inaction brings risks, too. If a growing chunk of the workforce has to make do with poor pay and worse pensions, governments will eventually have to pick up the pieces.

It seems that the real trouble only occurs in the grey area where a client / employer seeks to have all of the benefits of an employment relationship (mainly control over time and schedules, the way work is performed, and the individuals’ ability to work for other firms) without the costs of employment taxes, statutory benefits etc.

And, that cuts both ways as well. There have been several cases where individuals have enjoyed the higher cash benefits of being classed as a long-term, self-employed provider of services, only to bring a court case for employee-related stock benefits that they had been “denied”.

But, in most of these cases existing employment law, sensibly applied, should cope. The last thing we need is the burden of “employment rights” on individuals who are perfectly happy with their independent, sovereign professional status.

That said, there is a political motivation for greater legislation. With most workers tucked up in nice, simple and centralised employee contracts, HMRC could contract out its tax collection to employer firms. Managing many more independent small businesses is harder. Today’s Times carries a report that the Chancellor Philip Hammond is planning a “tax crackdown on synthetic self-employed“.

The Treasury reckons:

The Treasury believes a third of people claiming self-employed status as a “personal service company” are actually full employees and should pay more tax.

It says without reform, high levels of non-compliance with tax rules could cost HM Revenue and Customs, which collects taxes, £1.2bn a year by 2023.

Note: “high levels of non-compliance … could…”

 

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Memories matter more than money – the freelancer’s challenge

Tom Albrighton, on ABC Copywriting, reflects on the freelancer’s dilemma:

While freelance work will come again (touch wood), each precious summer will never come again. We may only have a handful of whole-family summers left, and to wish them away is ridiculous. Memories matter more than money.

All too true. Read Tom’s full piece, here.

 

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Robert Colvile on wrong-headed approaches to the Gig Economy – @TheTimes

Left-wing politicians and officials at HMRC dislike the gig economy because it doesn’t conform to their model of what work should be.

Yes, welfare and regulation need to be adapted, but changes should go with the grain of modern employment rather than against it. Not least because it’s what so many people actually want to do.

Read the rest in The Times, here.

A wilful determination to see participants in the gig economy as helpless victims risks destroying the very real value that sovereign professionals both provide and enjoy.

 

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The flexible workforce and the future of work

Short but interesting article on how business is responding to the rise of sovereign professionals by using this new, highly skilled and flexible workforce to power more agile and innovative business models.

This idea has been bubbling around for a few years. Back in 2012, Andrew Burke‘s research showed how freelancers contributed to both agility and innovation within firms (The Role of Freelancers in the 21st Century British Economy). Burke is now Dean of Trinity Business School and Chairman of the Centre for Research on Self-Employment.

Of course, the Irish management writer Charles Handy  foresaw all this in his 1990s books The Empty Raincoat (1995) and The Age of Unreason (2002). The ideas, however, finally seem to be gaining critical mass and traction with larger businesses.

In the last couple of years, Accenture have identified the move as one of the key trends in their annual Technology Vision:

Firms like MeasureMatch (a client of mine) are appearing to answer the need for reliable, responsive marketplaces to match buyers with the sovereign professional suppliers.

It’s an exciting time to be a sovereign professional.

 

 

The Medieval gig economy? @HistoryToday

History Today has a piece by David Long on the employment status of the average priest in Medieval times.

As various professions like Law were emerging, the Church was well established as a career of choice, easily overlapping power in the secular and spiritual worlds. A young priest from a well-heeled family could afford a good education and a professional role as a prince (or at least senior manager) of the church.

The average priest-in-the-street, however, had more of a portfolio career, picking up priesting gigs in the neighbourhood and mixing those with other consulting and “enforcing” jobs.

Long parallels this “hollowing out” of the front-line parish profession with today’s “ever more casual and commercialised” professions.

I think it’s simply another reminder that our perception of work as a solid, predictable, 9 to 5, 18 to 65, activity is a relatively modern (and fleeting) construct of the Industrial Revolution. Work wasn’t like that before, and it won’t be like that after.

 

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