Last month the Chancellor Rishi Sunak outlined  coronavirus support measures for the self-employed. Although the government has previously announced measures to support businesses by subsidising 80% of their wages, ministers were criticised for not going as far for the self-employed which includes thousands of contractors.

In light of criticism, Sunak has now announced the Self-Employed Income Support Scheme which proposes to extend a helping hand to self-employed workers impacted by the COVID-19 pandemic. The question being asked by many contractors, however, is whether they are eligible for the subsidy.

In this article, Umbrella Broker take a closer look at the new government measures to explain how they will work and who they will impact, to help contractors determine the best way forward.

Whether you are a limited company contractor, umbrella or PAYE worker, Umbrella Broker will explain what options are open to you.

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What is the Self-Employed Income Support Scheme?

The Self-Employed Income Support Scheme was set up by the government to support self-employed workers who have lost their income due to coronavirus.

The Scheme allows the self-employed to claim a taxable grant worth 80% of their trading profits, up to a maximum of £2,500 each month for the next 3 months with the possibility of extension if necessary.

The Scheme will not come into action until June 2020, and those who are eligible will be contacted by HMRC and asked to apply.

Who can apply for the Self-Employed Income Support Scheme?

Obviously, thousands of contractors will be wondering whether they can claim under the scheme. To be eligible, contractors must meet the following criteria:

  • Applicants must have submitted an Income Tax Self-Assessment tax return for the 2018-19 tax year
  • Have been trading in the 2019-20 tax year
  • Must be trading at the time of applying, or would be trading if not for coronavirus
  • Intend to continue trading in the 2020-21 tax year
  • Must have lost trading or partnership trading profits due to the pandemic

Under the scheme, self-employed trading profits must be less than £50,000 and over half of your income must come from self-employment.

To establish this, the government will determine whether at least one of the following conditions is true:

  • Your trading profits in 2018-19 are less than £50,000 and this constitutes more than half of your total taxable income
  • Your average trading profits in 2016-27, 2017-18 and 2018-19 are less than £50,000 and this constitutes more than half your average taxable income in the same period

Although many self-employed workers are relieved by the measures announced, there are still some big gaps in the Scheme. In fact, over one million self-employed workers aren’t eligible for the Scheme, including thousands of contractors.

Which contractors are eligible for the Self-Employed Income Support Scheme?

As set out in the terms above, it is estimated that 3.8 million of the 5 million self-employed workers in the UK will be eligible for the Scheme.

So, where do contractors stand?

  • Contractors operating under a limited company: many limited company contractors take their income from their company as a small salary and the rest as dividends. However, dividend income is not classified as self-employment income for the purposes of the Scheme. Therefore, these contractors will not receive additional support and may receive much less than they would have hoped for. Some limited company directors may be able to claim under the Job Retention Scheme which offers employers salary support of up to 80%. Directors can be furloughed if they meet the criteria, being an employee on PAYE.
  • Contractors with profits exceeding £50,000: will not be eligible for the Scheme. This applies to contractors whose profits that have exceeded £50,000 for the tax year 2018-19, or who have average profits exceeding £50,000 between the years 2016 – 2019.
  • New contractors operating as sole traders: any new contractors that operate as sole traders who have not submitted a 2018-19 self-assessment won’t meet the criteria.
  • Umbrella or PAYE company contractors: as these contractors are employed by their umbrella company or agency, umbrella contractors are not eligible for the subsidy. However, there are other options for umbrella contractors, namely the newly announced Job Retention Scheme.

What is the alternative for umbrella contractors?

As well as announcing details of the government’s Self-Employment Support Scheme, the Chancellor also laid out further details on the Job Retention Scheme and how this would work for PAYE workers.

Under the Job Retention Scheme employers can claim 80% of a furloughed employee’s monthly wage, up to £2,500 each month.

Any contractors that operate under an umbrella company and are paid under a PAYE system are therefore eligible to claim under the Job Retention Scheme for up to 80% of their income.

However, there are several key elements of the scheme that we await further clarification on, including how furlough pay will be calculated for workers whose income varies, including thousands on contractors.

Many umbrella employment contracts state the rate of pay as the national minimum wage plus a variable bonus, commission or additional pay. This enables the umbrella employee to carry out several projects at different rates of pay for different clients.

As it stands, the Job Retention Scheme proposes that any bonuses and commission should be excluded from the furlough pay calculation, meaning that many umbrella employees will only be eligible to receive 80% of the national minimum wage.

Until further confirmation from the government is offered, it is currently unclear how umbrella companies will calculate furloughed pay for umbrella or PAYE contractors.

Next Steps for contractors

With the Self-Employed Income Support Scheme failing to cover thousands of limited company contractors, many may be thinking about their next steps. Whether that’s moving away from operating under a limited company, to comparing PAYE vs umbrella, there’s a lot for contractors to think about moving forward.

For contractors who wish to access the benefits of employment with the freedom and control of self-employment, the answer is an umbrella company. Due to the popularity of this route, many umbrella companies have popped up, offering different levels of service. Although choice is great, it can be confusing for contractors to know the right one to pick.

That’s where Umbrella Broker come in. With our umbrella comparison tool, contractors can see their different options and how they compare, making it easy to find the best fit in a matter of minutes.

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