Why Jesse Norman’s claims about the state benefits limited companies have won't convince anyone
To defend against the charge that with private sector IR35 reform, the government will impose ‘zero-rights employment’ on contractors, Jesse Norman effectively claimed last month that personal service company directors should be grateful for the various benefits available, writes Christian Hickmott, chief executive of Integro Accounting.
In the Finance Bill debate of July 1st, the Treasury minister stated: "Such benefits include statutory maternity, paternity, adoption, parental bereavement and shared parental pay, and they are provided by PSCs, which are then able to claim 100% of those payments plus 3% compensation from the government.”
The strange case of benefits not being benificial
These apparent “benefits funded by the government” are supposed to be catered directly for these solo-person companies. However the sad truth is, that without the full understanding of how a PSC operates, these allowances are catered to supporting permanent employees much more significantly than PSCs. So much so, that actually the question arises -- Is it more beneficial for contractors to avoid applying for these benefits altogether?
As the chief executive of a contractor accountacy firm, and a father-of-three myself, I always want to ensure that our contractors have the best financial support that will benefit them and their family. I want to be completely transparent about the rights and protections on offer and what limited company directors should consider. Let’s look at whether Mr Norman’s claims stand up to scrutiny. So what support did the minister say is available?
1. Statutory Maternity Pay (SMP)
In the happy event that you find yourself expecting a baby; are adopting, or are expecting via a surrogate, you can claim Statutory Maternity Pay (SMP) through your PSC. If your partner is expecting and they are indeed an employee of the company, they are also entitled to this allowance too.
What do you get paid for SMP?
Statutory Maternity Pay (SMP) is paid for up to 39 weeks of leave. You will receive:
- 90% of your average weekly salary (before tax) for the first 6 weeks
- £151.20 or 90% of your average weekly earnings (whichever is lower) for the next 33 weeks
SMP is paid in the same way as your salary, i.e. monthly or weekly, however this is managed currently. Tax and National Insurance (NI) will be deducted at source. As a PSC, you can top up the SMP to whatever level you feel appropriate for the employee.
If the PSC is a ‘small employer’ (i.e. they pay less than £45,000 NIC a year), they can claim back 100% of the Employees SMP. In addition, the PSC can also claim 3% compensation.
How to qualify for SMP?
- Your salary must exceed £120 per week; £6,250 per annum as a salary/employment income.
- You must have contracted continuously for on or over 26 weeks.
- You must provide proof of the pregnancy in the form of a MAT B1 form (from a doctor).
You must log (through your company) when the baby is due and when the employee wants to start maternity leave. You must record this through your PSC within 28 days confirming your start and end dates.
2. Statutory Paternity Leave
Ok, so it’s now time for the partners to have some alone time with the new addition to the family! Paternity leave, which was next on Mr Norman’s list, is again applicable for new-borns, via surrogacy, and adoptions.
You can apply for either 1 week, or 2 consecutive weeks’ leave. The amount of time is the same even if you have more than one child (for example twins), but it cannot start before the new arrival. Therefore, the start date must be from one of the following:
- The actual date of birth
- An agreed number of days after the birth
- An agreed number of days after the expected week of childbirth
Leave must finish within 56 days of the birth (or due date if the baby is early).
The application process is the same as statutory maternity leave and should be followed as outlined in the above section.
3. Paternity Leave Pay
Statutory Paternity Pay for eligible employees is either £151.20 a week or 90% of their average salary, or whichever is lower. Tax and National Insurance need to be deducted.
Fortunately, all payroll software caters for this and allows the monthly Real Time Information reporting to HMRC of these claims.
4. Shared Parental Leave
Albeit not as common as statutory maternity or paternity leave (mainly due to one employee being the main contractor and income earner); Shared Parental Leave (SPL) is available to PSCs, as Mr Norman said. This applies to a mother with a partner who is eligible for maternity or adoption leave.
Where both parents have responsibility and care for the child, they can divide up to 50 weeks of shared parental leave between each parent.
To apply, it’s very much as is the case for other maternity or paternity leave, you must have had continuous work for a period no less than 26 weeks. The rate is the same as standard maternity or paternity leave, with £151.20 paid per week.
Sadly, you can not apply for both SPL and SML or SPL, but ultimately only one allowance route can be applied per couple.
5. Parental Bereavement Leave
In the heart-breaking event that your child passes away, parents can apply for Parental Bereavement Leave, which offers two weeks’ worth of support. Parental bereavement leave must be taken within 56 weeks from the date of the death. This also applies to adoptive parents too.
It is a case of simply completing a declaration form online and then declaring through your company the start and end date of your leave. This will entitle you to either 90% of your earnings or £151.20 a week, whichever is lower or higher.
Beyond these fixed figures, there are so many variables to compute. So this would have to be explored further, assuming that going through the numbers and process of getting financial support is an option bereaved PSC would like to endure.
Should I apply for the above five benefits?
So now you have the facts behind the Treasury minister’s soundbite, is it financially beneficial to apply for these benefits? Or is it worth reconsidering the support?
Firstly, I should acknowledge that the government is right to point out what is available to PSCs. But in some cases, PSC contractors are earning between £500 and £800 per day (based on our latest 2020 contractor survey results), and any good accountant will advise you that taking a basic salary and a portion of dividends is the most tax-efficient way or working. Dividends, however, will not be factored into the benefits offered; meaning that the rather enticingly worded “90%” that the benefit offers is actually applied to a very low salary rather than the overall income, as would be the case for a permanent employee.
As a PSC, you have nothing to lose in applying for the pay benefits outlined here, which Mr Norman cited, if leave will be taken. But the level of financial support you’ll receive is not comparable to the payments permanent employees in exactly the same situation as you -- the PSC -- are going to receive. In the current tax year, most employees earning more than £10,000 a year, will receive more support, financially from the government, than many contractors working through their own PSC. That’s especially the case, given that covid-19 income support for PSC directors is minimal.
In summary, what Jesse Norman is failing to acknowledge by stating that contractors who are employees “already receive a number of benefits funded by the government,” is that many PSCs who qualify for these benefits would actually see their revenue stream stop, if they were to take the leave options he outlined and which we’ve clarified. Much like the UK government’s income-support measures for companies during the covid-19 pandemic, the overall benefits package from the government for the owners of limited companies falls woefully short. Claiming it doesn’t, even implying it doesn’t, is just plain disingenuous.