Advice for Self Employed

Advice for Self Employed

UPDATED: Chancellor Rishi Sunak has announced a Self-Employed Income Support Scheme to help Britain’s 6m self-employed get through the coronavirus pandemic.

The Self-Employed Income Support Scheme will offer a taxable grant of up to 80 per cent of a self-employed person’s income based on their taxable profits over the past three years, capped at £2,500 per month.

The scheme will only become available at the beginning of June and will have an initial three-month lifespan, to be reviewed.

And the Self-Employed Income Support Scheme (SEISS) will only cover those who paid tax on trading profits of up to £50,000 of income in 2018-19.

HMRC will pay the single lump sum direct into people’s bank accounts.

Individuals should not contact HMRC now. Instead, HMRC will contact you directly, ask you to fill out an online form, and then pay the grant straight into your bank account.

The Treasury estimates that two-thirds of the roughly 6m self-employed will benefit from the Self-Employed Income Support Scheme, which it estimates will cost £9bn in its first three months.

Sunak claimed the Self-Employed Income Support Scheme, which will cover up to 95 per cent of people who receive the majority of their income from self-employment, is “one of the most generous in the world”.

Sunak said: “I’m proud of what we’ve done so far, but I know that many self-employed people are deeply anxious about the support available for them … Despite these extraordinary steps, there will be challenging times ahead. We will not be able to protect every single job or save every single business.”

Self-Employed Income Support Scheme at a glance

  • Same level of support as PAYE employees who face redundancy because of coronavirus
  • Up to 80 per cent of typical earnings capped at £2,500 per month gross. Income tax and national insurance still payable
  • Open to anybody with income up to £50,000 according to their 2018-19 tax return
  • Money paid by HMRC straight into your bank account – no need to contact taxman
  • SEISS will only go live early June at earliest
  • Available to people who make the majority of income from self-employment
  • Only those who have – or are about to make a tax return for 2018-19 tax return – can apply

The coronavirus self-employed rescue package is based on Norway’s scheme, which pays self-employed people 80 per cent of their average earnings over the previous three-year period.

The self-employed make up 15 per cent of the UK workforce and represent a sector worth an estimated £305bn.

Britain’s self-employed are a disparate group.  Analysis by the Institute for Fiscal Studies showed that about a third had taxable income of less than £10,000, while a small number of high-earning partners in professional firms rank among the UK’s top 1 per cent by income.

Emma Jones, founder small business support network, Enterprise Nation, said: “There will be some casualties. Those that are new to self-employment for example and those that have mortgages and bills to pay before June.”

>See also: How to get the government’s £10,000 cash grant for small businesses

What do I do now?

  • Check your prior year tax returns to assess whether you are eligible on the majority trading and £50,000 trading profit conditions
  • Get your tax return for 2018/19 filed if you have not yet done so (by 23 April 2020)
  • Grants are expected to be paid out in June, so there may still be some concern around cashflow until the grant is paid, and this will need to be factored into your cashflow forecasts
  • Consider other help you may be eligible for as a self-employed worker
  • If you haven’t heard from HMRC in the next few weeks and you believe you are eligible then do make your application to HMRC for the grant. HMRC will be checking your eligibility against its records and there will certainly be some who are in danger of falling through the cracks

Emma Beynon, a tax consultant at Kreston Reeves, said: “Remember, this is not tax-free income. The payments will form part of your trading profit for the year and be taxed along with the rest of your trading profits through your Self-Assessment Tax Returns.”

What if I’m a self-employed contractor with my own company?

The Self-Employed Income support scheme does not cover the 1.8m who are owner-managers of their companies, paying themselves mostly through dividends.

Tim Stovold, head of tax at accountants Moore Kingston,  told the Financial Times that 400,000 paid themselves mostly dividends through personal service companies.

Brian Palmer, tax policy expert at the Association of Accounting Technicians, said: “There were also no crumbs of comfort for those who are self-employed from every perspective but provide their services through a limited company, many of whom draw a low salary and top up their income with dividends. They will not qualify as self-employed or for a significant payment from the Coronavirus Job Retention Scheme. Instead, they risk dropping through the cracks.”

Seb Maley, CEO of tax specialist for freelancers and contractors Qdos, added: “The chancellor may have delivered for millions of self-employed workers, but hundreds of thousands of genuinely self-employed individuals working through their own limited companies have been overlooked.

“Like employees, these people pay their tax, contribute billions to the economy and are helping the UK through this crisis. So it’s concerning that the Government has ignored them when it matters most.”

Beynon added: “Although taxpayers who trade through their own company may consider themselves self-employed, these measures do not extend to cover the shareholder directors of personal trading company. The Coronavirus Job Retention Scheme offers some cover to employees but directors are unlikely to benefit as they are central to the ongoing operation of the business.”

Treasury officials argue that is impossible to know whether the dividends came from the fruits of their work or from passive investments.

Also, the government believes that some self-employed contractors have been engaging in tax avoidance by setting up personal service companies and do not deserve support.

However, the Treasury suggests that self-employed contractors who work through personal service companies and pay themselves dividends could furlough themselves and apply for the Coronavirus Job Retention Scheme.

Applying for Universal Credit in the meantime

The chancellor said that in the meantime self-employed workers can apply for Universal Credit, which has been temporarily increased to match levels of statutory sick pay (£94.25 a week) with the “minimum income floor” scrapped.

However those applying for Universal Credit for the first time will usually have to wait for five weeks to receive a pay cheque.

And any self-employed person with savings of £16,000 or more is not entitled to any support via Universal Credit so will have to wait until they have burned through their savings in order to qualify.

Prior to today’s announcement, the government pointed out that it had already strengthened “the safety-net for the self-employed” through delaying self-assessment tax payments due in July until January 2021.

Self-employed workers will also be able to claim business interruption loans worth up to £5m.

>See also: What coronavirus small business help is available for free?

Self-employed face tax hike

Rishi Sunak also hinted that the self-employed, who traditionally pay less tax than those under pay-as-you-earn (PAYE), will have to pay more tax once the crisis is averted.

The self-employed typically pay less in income tax and national insurance than PAYE employees because their bills are based on tax-deductible profits.  According to the Resolution Foundation a self-employed worker on £25,000 pays £300 a year less in national insurance than an employee on the same salary.

Until now the tax system has recognised that the self-employed have no paid holidays or job security, and so pay less tax as a result.

Sunak said the “very significant tens of billions of pounds” being spent to treat self-employed people the same way as employed people during this time of crisis “throws into light that inconsistency and whether that is fair going forward when we’re all chipping in together to right this ship afterwards”.

Emma Jones, founder small business support network, Enterprise Nation, said the chancellor’s words were “a warning shot that this will give the government a very good reason to change employment law and implement something similar to IR35 and other tax measures with renewed vigour as the self-employed, on this occasion, have asked to be treated in the same way as employees. If this applies to tax, there will be more changes ahead for the self-employed down the line.”

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