New concerns have been raised about universal credit, the government’s flagship welfare reform, after a new analysis suggested that the vast majority of self-employed people with low earnings could lose thousands of pounds.

More than three quarters (78%) of self-employed people – such as Deliveroo and Uber drivers – on a low income in London will be more than £4,000 a year worse off as a result of universal credit, according to a study by the Policy in Practice consultancy.

The revelation has led MPs and campaigners to call for a rethink on the government’s flagship welfare reform. Frank Field, the Labour chair of the work and pensions select committee, said it was “another razor cut at the vulnerable human underbelly of the labour market”. The government has already been forced to slow down the roll-out of universal credit and overhaul how claimants are paid after complaints that some waiting weeks for their payments and falling behind with their rent.

However, serious problems have now emerged in the treatment of the self-employed because of the way their earnings are recorded under universal credit. The issues have arisen because a “minimum income floor” (MIF), based on the national living wage, is used to calculate universal credit payments each month.

Because self-employed workers’ earnings fluctuate from month to month, they sometimes fail to meet the minimum figure and lose out compared with salaried counterparts. They are also only given a year to get their businesses off the ground before the MIF kicks in. Using analysis of cases from 19 London boroughs over two years, Policy in Practice found that 78% of self-employed households on low-income in London are set to become £344 per month worse off under the new system.

Ministers argue that the system has been designed to encourage people to increase their work and move into better jobs. However, the new report warns that some people have little choice other than self-employment.

Sally Beadle, a self-employed children’s entertainer in Norfolk, said she would be affected by the new system. “Most of my money I earned in June, July, August and then December,” she said. “I have a small amount of money coming in this month, but not paid bookings this time of the year. If I earn under the minimum income floor, I don’t get any extra help. It’s not just me. It’s gardeners, childminders. This is thousands of people. If I had to go to an employer, I would probably end up becoming very anxious and depressed and eventually become physically sick with it. I could see a situation in which I would be signed off, on long-term sickness benefits, living on the bare minimum; I would lose my private rented house.”

Field said: “Given what we now know about the hundreds of thousands of workers in the gig economy who earn less than the national living wage, it begs the question as to how many grafters and entrepreneurs are going to be further impoverished, or pushed deeper into debt, as a result of this new hole being opened up in the safety net.”

Giovanni Tonutti, who led the analysis for Policy in Practice, said self-employment could be a valuable route into work for people who would otherwise struggle as employees. “The blunt application of the minimum income floor could deter many people in this group from taking their first steps into work, undermining the overall aim of universal credit.”

David Finch, from the Resolution Foundation thinktank, said: “It is a key example of where the design of universal credit is failing to match the reality of self-employed people’s lives.

“That stems from the fact that they are expecting self-employed people to report their earnings on a monthly basis as if they were employees, when they are far more likely to have variable income over a year – and then applying a minimum income floor on a monthly basis. The two combined create these high losses.”

Chris Goulden, deputy director of policy and research at the Joseph Rowntree Foundation, called for the one-year grace period to be doubled. .

A DWP spokesman said: “Universal credit supports self-employed people for up to a year while they establish their business; however, it is not designed to prop up unviable businesses.

“If, after a year, the business isn’t meeting the minimum income floor, and someone wants to continue to receive benefits, they will have to either increase their self-employed earnings or look for other work.”

78%

The amount of self-employed people on low earnings in London who could lose out as a result of universal credit

£344

The monthly sum that these households could lose under universal credit – or more than £4,000 a year