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We need to talk about ‘self-employment’

4 weeks ago

Rises in Corporation Tax might change the way business owners structure their future earnings but how might the existing, and now extended, COVID financial support schemes influence those setting up brand new firms?


Despite the existence of the ‘Self-Employed Income Support Scheme’ (‘SEISS’), the Institute for Fiscal Studies has found that around 1.8 million self-employed people and around 700,000 company owner/managers are not eligible for it.


Why is this?

There are over 5 million self-employed people, some with low earnings right through to those with very high levels. The Supreme Court ruling in the Uber case also highlighted that many ‘workers’ who are subject to many of the same terms as employees but with no employment rights could also be included.


The COVID-19 pandemic meant a realisation for some that self-employed earnings are not the same as dividend income. The headlines tell the story of a self-employed person asking where their support is – where in reality, they have set up a limited company and are extracting profits as dividends.


Although it might be obvious to financial professionals, there is clearly a large number of people who feel like the door to any kind of dividend support scheme has been firmly shut in their face by the Government and little has been done (in their eyes) to communicate why it isn’t willing to explore the option.


The difficulty the Treasury has is that it cannot offer support to every person receiving dividends – despite the cries of “I pay my taxes” and “look at my tax returns” – because there is no simple way to tell whether the dividends are payable to a company director, a silent investor, or even a shareholder of a public company. To interrogate the returns of millions of people would no doubt involve an enormous amount of extra time and money and possibly (invariably) be wrong.


What might change?

Post-financial crisis, a wave of people became self-employed through necessity rather than choice. Setting yourself up to work via your own limited company was once seen as the lowest-risk strategy that came with a tax advantage – and many other companies (pre-IR35) were happy to engage the services of people on this basis as they would not need to pay employee costs (notably employer NI). Some feel that they were forced into setting themselves up this way to get work.


Consequently, the limited company structure is now used by a huge number of SMEs. Government figures show that at the start of 2020, 946,000 limited companies had no employees.


It is relatively easy to set up a limited company and it isn’t uncommon for somebody not to take any professional advice on the best structure for them at outset – so, until faced with a shock or crisis event, many have little understanding of the risks.


There is also a lack of understanding of the alternatives available – for example, partnerships and in particular limited liability partnerships (LLPs). For many smaller ‘low-risk’ businesses, the ability to run costs such as a car through the LLP without it being taxed as a benefit in kind on the individual is often overlooked simply because the headline rates of Income Tax on profits drawn are higher than for dividends. An LLP still limits personal liability and has the flexibility for members to alter the profit share each year to make full use of individual Income Tax bands and allowances. Those very Income Tax bands that will be frozen come April until 2026.


The decision to set up a business felt like it used to have a default option. Even though it might have not been the best option in all cases anyway, now more than ever it seems there is a need for advice on how to structure your business and earnings to get yourself in the optimum position for support if that becomes necessary.


Never mind the advice gap, there is a tax advice gap too.

This article was previously published by FT Adviser

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Charlene Young

Charlene Young

Job Title
Senior Technical Consultant

Charlene is a Chartered Financial Planner with over 10 years' experience in financial services. She joined AJ Bell in 2014 after relocating to Manchester from Bristol, where she held financial planner and paraplanner roles at leading firms. In addition to analysing and commenting on technical and regulatory issues, Charlene is also responsible for designing and providing technical training for AJ Bell staff.

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