Can a director of a limited company claim benefits?
Outside the forgettable and not very impactful range of support measures released by the government to support small, entrepreneurial businesses during Covid-19, what ‘benefit’-type measures are available to support limited company directors?
With the bottom line of contractors and just about everyone else being squeezed, let’s consider three of the main state benefits, and assess how, if at all, contractors might be able to find some relief by claiming them, writes Chris James, head of limited company accounting at Workwell.
Universal Credit replaces ‘legacy benefits’ like housing benefit and income support.
Often shortened to just ‘UC,’ Universal Credit can be available to the self-employed, if you are on a ‘low income’ -- but you must for a start have less than £16,000 in money, savings and investments (which includes company capital, see below). And so for many people including ContractorUK readers, this route might unfortunately be a non-starter.
For the corporate self-employed, the Department for Work and Pensions (DWP) ignores the limited company structure when it comes to Universal Credit, and so for a single director with their own company, the company’s income is seen as ‘earnings’, the shareholding value is ‘capital’, and so on.
Unusually, the company value is taken ignoring assets used in the business, and so most assets (except usually property) commonly seen on a PSC’s balance sheet, will be excluded from the value when comparing to the £16,000 threshold.
Circumstances, rules and exemptions
If the benefit of Universal Credit applies, it is made up of a standard basic allowance related to your age, and whether you’re in a couple, among other factors worth having a look at on the eve of application. Additional amounts are sometimes given for circumstances like having children and looking after a disabled or elderly family member. There are many rules and exceptions.
The benefit operates by reducing the amount of support you get if you earn more than the allowance you are entitled to.
Currently, if you get no help with housing costs, you can ‘earn’ £573 per month without ‘penalty’. Above this level, you lose 55p per pound earned, until the allowance is used up completely.
Surplus income and the minimum income floor
If you (or ‘your company’ in the PSC director’s instance) earn more than £2,500 per month, you start to accrue ‘surplus income,’ which can reduce the benefit available in a future month, if the relevant ‘earnings’ fall back below a level where the benefit would again become due.
In addition, there is a ‘minimum income floor’ in place for the self-employed, which assumes that your income is roughly the minimum wage for your age, at 35 hours per week.
There is therefore, only a very small set of circumstances where UC could be a realistic option for a limited company contractor.
To obtain Universal Credit, you do need to liaise a lot with the DWP, consult with a ‘work coach’ and provide a lot of information and evidence to substantiate your claim. Without this, payments could be delayed or not paid out at all.
At the time of writing, Jobseeker’s Allowance (JSA) is being effectively phased out in favour of similar support through UC.
But JSA operates differently and ‘looking for work’ (and continuing to do so) is the key deciding factor in terms of eligibility.
You must have been employed previously and have paid Class 1 NIC, so for some contractors, this route will be automatically closed, depending on the level of salary you might have chosen.
For the levels commonly used for sensible PSC tax planning though, the conditions are likely to have been met if a sufficient length of time has elapsed while receiving a moderate salary (usually the two tax years prior to the year of claim).
Next, you have to be working less than 16 hours per week (or not at all) to claim, and for the over 25s, the rate is currently £77 per week. You then have to ‘sign on’ and actively seek work to qualify. Also, you must have not voluntarily reduced your hours or stopped work – you have to have ended up with little or no work due to the economy and/or market conditions.
It should be remembered that the trading status of your company, and the expenses it claims, may interact with any claims you’ve made for JSA due to an inability to generate income, so this is a serious step to take, as with the claiming of all benefits. Take advice from your accountant before acting.
Further consider, both JSA and UC are not available to pensioners – different benefits exist instead. UC was intended to be a powerful evolution of the historic benefits system. While it is understood that the DWP now have access to information that could be used to better support those most in need, the complexity of the system (especially for the old and vulnerable) has some way to go.
It’s much simpler to qualify for Child Benefit (CB) as a limited company contractor, but the operation of CB continues to be a thorny issue for those at certain income levels.
Working through a PSC still offers some slight easing of these issues, in some circumstances. An annual benefit of just over £1,100 for a first child, and £750 for additional cherubs is available -- but only if you or your partner’s income does not exceed £50,000.
The £50k threshold: caution advised
Meanwhile, the notorious problem with child benefit remains unsolved. If only one person in a household has income, then the household can only earn £50k before the child benefit is systematically reduced until at £60,000, it is nil. If two people earn, then up to £100,000 can be earned if shared equally, without a loss of benefit.
So, for a limited company contractor, if a spouse has no income, ensuring that dividend income is shared in accordance with shareholdings can be a viable option, allowing far more income into the household before CB is lost.
Remember, that income for this purpose includes many elements including PAYE income before deductions (except net pay pension deductions), rental income, and dividends. So, in most cases it is only dividend income that can benefit from any ‘planning’ in terms of the timing of transactions. In this way, you may be able to limit individual income to £50,000, while the household receives significantly more. Again, if in doubt, talk it out with your accountant.