The COVID-19 pandemic has impacted workers across the UK. Amongst them, contractors have been hit, with many contracts being put on hold or cancelled altogether.
Although many contractors can apply for financial protection through the government’s Job Retention Scheme, some are not eligible and must secure help elsewhere. This all depends on how you contract, whether through an umbrella, agency or limited company.
In the midst of a third national lockdown, disruption to workplaces continues. To help contractors know what help they are entitled to, in this guide Umbrella Broker looks at the Job Retention Scheme, who can apply for it and what the alternatives are if you don’t qualify.
The Job Retention Scheme defined
The government introduced its Job Retention Scheme to help those employees that can no longer maintain their workforce because they have been badly hit by the coronavirus pandemic.
Under the Job Retention Scheme, employers can put their employees on furlough, a grant which covers 80% of the employee’s monthly wages up to a maximum of £2,500 each month. The Scheme has recently been extended until the 30th April 2021.
Who is eligible to receive furlough?
Any employee, whether they are part-time, full-time, zero-hours or an agency worker, can receive furlough pay if they contribute PAYE tax. A worker can be paid furlough for any amount of time.
Are contractors eligible for furlough?
As we have already mentioned, the answer to whether contractors can receive furlough pay differs according to how they contract.
Next, we will look at the different types of contractors and whether they qualify for the Job Retention Scheme.
Furlough for umbrella contractors
A contractor working through an umbrella company is employed by the company and therefore pays tax through the PAYE system. For this reason, umbrella company contractors are usually eligible for furlough pay.
The umbrella company is responsible for setting up payments to the furloughed contractor, and this should be agreed between the company and contractor.
This is great news for umbrella company contractors who find that their contract work has been badly impacted by COVID-19.
That’s the case for umbrella company contractors, but what about other types of contractors?
Furlough for limited-company contractors
Any contractor that operates through a limited company and has made themselves an employee of the company, therefore paying tax through PAYE, will usually qualify for furlough. This can be applied for through the government’s website.
It is worth taking into account, however, that although the Job Retention Scheme covers 80% of PAYE income, dividends will not be accounted for. This may cause loss of income for some limited company contractors who partially pay themselves through dividends.
Although this is the case for contractors who are an employee of their limited company, for those self-employed contractors who pay tax through self-assessment and not PAYE will not qualify for the Job Retention Scheme.
What is the alternative if I don’t qualify for furlough?
Thankfully, if you are a self-employed contractor who pays tax through self-assessment, there are other forms of help out there, namely the Self-Employment Income Support Scheme. Just like the Job Retention Scheme, this was introduced by the government as a means of support for self-employed workers who have been badly impacted by the coronavirus pandemic.
Just as with the Job Retention Scheme, the Self-Employment Support Scheme has also been recently extended, with the deadline to apply for the third grant being the 29th January 2021.
Even if you did not apply for the first and second grant, you can still apply for the third grant. Those that did apply for the first and second grants but weren’t eligible to receive anything will not receive anything under the third grant.
The Scheme gives self-employed workers 80% of their average monthly trading profits which is paid in a single instalment covering 3 months’ worth of profits. This is capped at £7,500.
Contractors can apply for the Self Employment Income Scheme online via the HMRC website.
To qualify for the Scheme, contractors must have traded between 2018 – 2019 and 2019 – 2020. You must have submitted self-assessment in 2018 – 2019.
There are also further criteria the contractor must meet, including:
- You must currently be trading
- You must have been badly impacted by the pandemic
- You must declare that you intend to continue to trade
- You must believe there will be a significant reduction to your trading profits due to the pandemic
Although the Scheme has been a crucial lifeline to many self-employed workers, unfortunately,
many have been left unable to claim as they do not meet the criteria. For this reason, and
with upcoming reforms to IR35 legislation as of 6th April 2021, many
self employed contractors will now be considering moving to an umbrella company.
Why operate through an umbrella company?
An umbrella company offers the freedom and flexibility of contracting coupled with the security of employment. That is why it has been an increasingly popular route for contractors across the UK.
An umbrella company employs the contractor, therefore paying them a salary and deducting their tax through the PAYE system, meaning no tricky tax calculations. On top of this, under an umbrella company contractors are entitled to statutory benefits such as sick pay, holiday pay, maternity/paternity leave and a workplace pension.
What’s more, umbrella contractors are exempt from IR35 legislation, meaning they don’t have to worry about any nasty surprises.
So, if you are considering making the move to an umbrella company in 2021, let Umbrella Broker help you find the best umbrella company for you.
