Universal Credit poses a threat to entrepreneurs in the UK and is in urgent need of reform, according to an open letter from business, union and charity leaders.

The letter, addressed to Department for Work and Pensions (DWP) Secretary Esther McVey, flags the damage that the Minimum Income Floor (MIF) – an assumed level of earnings which dictates Universal Credit payments for the self-employed but not employees – is doing to the UK’s 4.8m-strong self-employed community.

Because sole trader incomes typically vary over the course of a year, calculating monthly UC entitlements according to the MIF sees self-employed claimants lose out compared to employees. A sole trader earning £12,000 a year, for example, can receive £2,500 less in UC entitlement per annum than an employee earning the same amount. 

The letter – signed by the Federation of Small Businesses (FSB), Royal Society of Arts (RSA), National Farmers’ Union (NFU), Royal Agricultural Benevolent Institution (RABI), The Trussell Trust, Gingerbread and the Child Poverty Action Group (CPAG) – calls for application of the MIF to be reformed to reflect the realities of self-employment.

Self-employed claimants are only exempt from the MIF during their first year of claiming UC, despite evidence indicating that it takes at least three years for a self-employed person to reach the MIF’s assumed level of earnings.  

The Commons Work and Pensions Committee recently stated that the DWP has not offered “any evidential basis” to justify such a short start-up period.

The committee argues that enforcing the MIF at such an early stage “flies in the face of the entrepreneurial spirit the government wants to nurture.” 

Signatories to the letter are calling for the start-up period to be extended to take account of the realistic timeframe required to establish a viable business.

As the rollout of UC continues, they are also urging the DWP to thoroughly assess its impact on the self-employed community. UC is expected to support 700,000 self-employed claimants by 2022, but no significant analysis of its effect on sole traders is expected until at least autumn 2019.

FSB national chairman Mike Cherry said: “The Universal Credit system is stifling the job and wealth creators of the future. Of course you can’t support struggling businesses forever, the problem is that Universal Credit – as it currently stands – doesn’t even give sole traders the chance to get off the ground. Not every entrepreneur can be blessed with a lot of start-up capital.”