A cross-party Commons Work and Pensions Committee has found that the Universal Credit system leaves self-employed workers worse off than employees.
The current system of monthly income assessments used to determine Universal Credit (UC) "fails to deliver parity of treatment between employees and the self-employed" its report concludes.
Under UC's monthly Minimum Income Floor (MIF) calculations, "self-employed people can miss out on important support not because their income is inadequate, but because it is volatile".
Evidence before the Committee suggested that some self-employed people were up to £3,000 pounds a year worse off than employees on a similar income because of the monthly calculations.
The report is calling for a significant extension of the monthly MIF period - up to a year - to help account for fluctuating incomes.
It is also recommending an extension of the "start-up period" built into Universal Credit. Currently set at one year, this is the period new businesses are excluded from the MIF to allow them to get themselves off the ground. The Committee has said this period should be extended to up to three years.
The Association of Independent Professionals and the Self-Employed (IPSE) has welcomed the report. Chris Bryce, IPSE ceo, said: "Universal Credit just doesn't work for freelancers and the self-employed. Monthly income reporting requirements punish self-employed people because they fail to account for the uneven nature of their income - something the report rightly highlighted was an 'entirely normal feature of self-employment'. "
He added: "Giving self-employed people more time to get their enterprises up and running before the income assessments kick in would be a welcome pro-business move … we hope Government will take heed of what the Committee is telling them."
The Federation of Small Businesses (FSB) has also welcomed the report. National chairman Mike Cherry, said: "It's good to see the Work and Pensions Committee echoing our concerns about a system that encourages users to take a job rather than create one. The Minimum Income Floor is bad for entrepreneurialism, pure and simple. We know that it generally takes two to three years to get a viable firm off the ground. The Universal Credit system fails to recognise that fact and, in doing so, threatens the futures of successful firms. Our hard-working self-employed community deserves better."