Jonathan Athow explains how ONS measures earnings and how there is no easy solution to calculating self-employed income just yet.
In recent years more and more people have become self-employed. That has increased the demand for statistics to tell us who these people are and how much income they have.
We measure the number of people who are working, either employed or self-employed, through the Labour Force Survey. This is a large national survey – around 40,000 households a month covering 100,000 individuals – that asks people about whether they are working, and if so, their employment type. This gives us a good handle on the number of employees and self-employed, and their characteristics such as age and how long they have been in work.
Information wages for employees primarily comes from surveying employers, asking them about the people on their payroll. The Monthly Wages and Salaries Survey and the Annual Survey of Hours and Earnings provide most of the earning statistics we produce. The monthly survey feeds into the snapshot Average Weekly Earnings statistics published every month and the Annual Survey of Hours and Earnings provide more detailed data for April each year. As the self employed do not have an employer, their self-employed income will not be captured in either of these measures.
In the future, access to ‘real time information’ data from the income tax Pay As You Earn (PAYE) system is likely to be a rich source of data on wages. As with our surveys, however, this data will not include income information for the self-employed as their self-employment income is outside PAYE.
This means the only way of currently finding out about self-employed incomes is by surveying the self-employed themselves. This can be quite challenging.
Firstly, many self-employed people have irregular income depending on how much they have worked recently. The nature of their work might also make it difficult to allocate income to a particular period of time. For example, a builder might undertake some work that spans several weeks or months: how should the payment for that work be apportioned?
Secondly, a self-employed person’s income is calculated after deducting the cost of inputs into their trade, for example, fuel for taxi drivers. As with their income, some of their inputs will be quite irregular, for example if the taxi driver buys a new car, which means one would need to work out how to allocate this cost to particular time periods.
Lastly, even if we could work through these measurement issues, self-employed people might not have the records at hand to be able to accurately provide the information. Rather self-employed people will put together their income data on an annual basis to submit for income tax purposes under the Self Assessment system. This is a possible source of data to understand self-employment earnings, and Self Assessment has rules to deal with the measurement issues such as the cost of inputs and irregular payments. The biggest challenge is timeliness: people are not required to submit a self-assessment return until 10 months after the tax year in question. So data on 2015-16 income need not be submitted until the end of January 2017.
At present, therefore, there is limited information on self-employment incomes. The Department for Work and Pensions include extensive questions as part of the Family Resources Survey. This asks for a number of sources including information submitted as part of the self-assessment system. This contributes to long lags in the production of the survey, which is published around 15 months after the year in question.
HMRC also publish some information on self-employed income from their Survey of Personal Income, based on a sample of administrative data from the income tax system, and is subject to the similar timing issues. Moreover, the Survey of Personal Income is based on individuals rather than households. The Family Resources Survey is a household survey, therefore providing a richer source of data about the self-employed and their family circumstances.
There is currently, therefore, no timely estimate of self-employed income. There is also no other administrative data held by Government that could be used to speed things up. We have also looked to if there is data held outside government that could be used to infer what is happening with self-employed incomes, but at present there does not appear to be a readily available source.
A possible source for the future is HM Revenue and Customs’ “Making Tax Digital” programme. This will involve the introduction of digital record keeping and quarterly updates for many small businesses, including some self-employed people. This could provide a valuable source of timely data. Making Tax Digital is being introduced over a number of years, and for the smallest business – those below the VAT threshold, which will include many self-employed people – participation will be voluntary. It will therefore be a number of years before we understand how useful this data will be and how it could be used to better understand businesses and the self-employed.
This is a real challenge in how to address the issue of self-employment income. The Family Resources Survey is the richest data source. In the future there may be new administrative data sources available, and we continue to look for alternative data. There appears to be no easy or quick solution here.
Jonathan Athow is National Statistician for Economic Statistics at ONS