COVID-19 government support: What about one-person limited companies?
In a recent blog I called for more support for the UK’s 4.8m self-employed, who, like many others, are badly affected by COVID-19. Most of them would have been relieved to hear the Chancellor’s latest COVID-19 announcement (26 March), which did include support for the self-employed.
Crucially, they will receive a “direct cash grant of 80% of their profits, up to £2,500 per month”, delivered via a “ground-breaking UK-wide scheme to help them during the coronavirus outbreak”, according to the government. They’re unlikely to get it until June, but at least it’s something.
Self-Employed Income Support Scheme
HMRC is creating the new “Self-Employed Income Support Scheme”, which will “bring parity with the Coronavirus Job Retention Scheme”, announced in the Chancellor’s first round of COVID-19 business support measures.
The Self-Employed Income Support Scheme will help “95% of people who receive [most] of their income from self-employment”, says the government. “Cleaners, plumbers, electricians, musicians, hairdressers and other [eligible] self-employed people will be able to apply to HMRC for the taxable grant, using a simple online form, with the cash being paid directly into [their] bank account.”
The scheme will be open to those “with a trading profit of less than £50,000 in 2018-19 or an average trading profit of less than £50,000 from 2016-17, 2017-18 and 2018-19. To qualify, more than half of their income in these periods must come from self-employment.” HMRC will use existing information to “check potential eligibility and invite applications once the scheme is operational”. Fantastic. Genuinely brilliant.
What about one-person limited companies?
The devil is always in the detail, with the government also announcing that: “Those who pay themselves a salary and dividends through their own company are not covered by the scheme but will be covered for their salary by the Coronavirus Job Retention Scheme if they are operating PAYE schemes.”
This is bad news for very many people who, when starting their business or seeking to grow it, incorporated (ie registered) a private limited company, of which they are the managing director (and often sole share holder). Although not sole traders, many of these would consider themselves self-employed; their business is merely registered differently. According to BBC News, a tenth of the UK’s self-employed population is made up of people who operate as a limited company.
Many managing directors pay themselves £719 a month through the company PAYE scheme, so that they’re entitled to the benefits that come from paying National Insurance. The rest of their take-home comes from shareholder dividends they receive. The company also pays Corporation Tax (19% on profits).
Reality check
A gleeful “boo-f**kin-hoo” was the less than kind reaction from some on social media to the news that one-person limited company managing directors would get as little as £560 or so a month (£140 a week) to support themselves through COVID-19. This is significantly less than furloughed employees will receive and far less than many sole traders will now get.
Some believe that setting up a limited company rather than operating as a sole trader is a tactic that enables you to pay significantly less tax. Once upon a time, it would have been, when no tax was payable on dividends of £10k a year (a measure introduced by Gordon Brown to encourage people to set up companies). Those days are long gone. The dividend allowance now is £2,000, after which a basic rate of 7.5% is payable on dividends (those in a higher income tax bands pay either 32.5% or 38.1%).
Dividends aren’t guaranteed. They can only be paid to shareholders if there’s enough cash in the company. In bad months (speaking with experience), the MD of a single-person limited company may take home little or nothing. So, the “tax advantages” of trading as a limited company aren’t a clear-cut as some on Twitter imagine. Moreover, many incorporate a limited company to shelter themselves from personal financial liability or for many other reasons not linked to tax liability. The tax admin costs of a limited company can be significantly higher than for a sole trader business.
Time to think again Mr Chancellor?
Up until last week, it wasn’t clear whether the government would support the self-employed, but now, it will. The government has already acted to support businesses in the hospitality and retails sectors, as well as employers and their staff, to ensure that they have enough money to live on. Would it not be fair to reconsider and offer greater support to single-person limited companies?
There are two million limited companies in the UK, making up 34% of the total business population. About 890,000 UK companies have no employees – these are the one-man and one-woman band businesses that also make a vital contribution to the UK economy. If not supported through these dark days, many will go to the wall, which will have a major impact on the UK economy and its ability to recover.
The Chancellor, Rishi Sunak, is on record as saying he will do whatever it takes to support UK businesses through COVID-19. It remains to be seen whether this applies to some 890,000 limited companies – a sixth of the nation’s total business population – that together pay a colossal amount of tax to the Exchequer. Hopefully, he’ll do the right thing and think again.
• Amanda Evans has started an online petition on Change.org calling for “Small Ltd Company Directors to get Government support like the Employed and Self Employed”, which you can sign. It’s calling for managing directors to be “entitled to 80% of their filed average earnings, including dividends which are already taxed! (Up to £2500 like the employed and self employed).”
• You may also want to lobby the Federation of Small Businesses and Forum of Private Business or contact your local MP.
Mark Williams is a freelance editorial consultant, editor, journalist and SME content specialist with more than 25 years’ experience. He has written for The Guardian, numerous leading brands and award-winning magazines and websites. Visit www.markiwilliams.com