Contractor Ltd Co - whats my employment status?
Discussion
Quick question. I'm the director of my own personal services company (IT/Finance contractor). My only renumeration is dividends. I don't pay myself a token salary because I couldn't be bothered with the hassle of PAYE and NI frankly. I realise I pay more CT as my costs are lower but I'm OK with this.
Partner is now pregnant and due in August. She is giving up work Christmas Eve.
I realise she will not get SMP, but she does meet the criteria for Maternity Allowance (MA).
Question is, all the online resources indicate that some components of MA eligibility are dependent on the partner. The main issue seems to be 'is your partner employed, self employed, or unemployed?'
What am I?
Partner is now pregnant and due in August. She is giving up work Christmas Eve.
I realise she will not get SMP, but she does meet the criteria for Maternity Allowance (MA).
Question is, all the online resources indicate that some components of MA eligibility are dependent on the partner. The main issue seems to be 'is your partner employed, self employed, or unemployed?'
What am I?
None of the above.
You are not employed - because you do not draw a salary from your own company. Indeed, you have not even registered your company as an employer - so you have doubly emphasised this.
You are obviously not employed by the organisations to whom you provide your services - as you do that through a trading entity i.e. your limited company.
You are not self employed because you have not set up your trading operation as a sole trader.
Although you are not employed, you are also not "unemployed". Being "unemployed" is not the opposite of being "employed".
You are, in effect, living off investment income only. The dividends you extract from your company do not count as earned income because you are receiving these dividends - not because of the work you do - but because you have bought shares in a company i.e. invested in that company. That is the whole POINT of drawing dividends only. Because they are not earned income, they do not attract any National Insurance contributions and are taxed in a different way to salary from an employment or profit from a sole tradership or share of profits from a partnership.
The upshot of this is that entitlement to Government benefits etc is often linked to earned income and NI contributions. As you have chosen to only take dividends, you have operated outside the "system" to some extent.
The usual advice is for a director to at least take a salary that will trigger an NI record at HMRC.
You are not employed - because you do not draw a salary from your own company. Indeed, you have not even registered your company as an employer - so you have doubly emphasised this.
You are obviously not employed by the organisations to whom you provide your services - as you do that through a trading entity i.e. your limited company.
You are not self employed because you have not set up your trading operation as a sole trader.
Although you are not employed, you are also not "unemployed". Being "unemployed" is not the opposite of being "employed".
You are, in effect, living off investment income only. The dividends you extract from your company do not count as earned income because you are receiving these dividends - not because of the work you do - but because you have bought shares in a company i.e. invested in that company. That is the whole POINT of drawing dividends only. Because they are not earned income, they do not attract any National Insurance contributions and are taxed in a different way to salary from an employment or profit from a sole tradership or share of profits from a partnership.
The upshot of this is that entitlement to Government benefits etc is often linked to earned income and NI contributions. As you have chosen to only take dividends, you have operated outside the "system" to some extent.
The usual advice is for a director to at least take a salary that will trigger an NI record at HMRC.
Edited by Eric Mc on Thursday 17th December 12:31
Thank you very much Eric for your comprehensive answer.
I thought as much. 'Unemployed' as a status was the closest to my thoughts, but yes, this is the opposite of 'employed' so not strictly true.
If I register my company for PAYE and employ myself, can any wage and NICs be retrospectively applied? Or for state benefit purposes does it only matter that I am 'employed' at the time of the application?
My partner would have been entitled to SMP, but shes having to give up work early for other reasons. If I wasn't around (or I was unemployed) she would be entitled to MA. It seems a quirk that MY lack of recognised employment status disqualifies HER from MA as its the only benefit she's ever had (or not had thanks to me!)
I thought as much. 'Unemployed' as a status was the closest to my thoughts, but yes, this is the opposite of 'employed' so not strictly true.
If I register my company for PAYE and employ myself, can any wage and NICs be retrospectively applied? Or for state benefit purposes does it only matter that I am 'employed' at the time of the application?
My partner would have been entitled to SMP, but shes having to give up work early for other reasons. If I wasn't around (or I was unemployed) she would be entitled to MA. It seems a quirk that MY lack of recognised employment status disqualifies HER from MA as its the only benefit she's ever had (or not had thanks to me!)
Look on it this way, you have been able to pay over far less to HMRC because of the way in which you chose to conduct your affairs. The downside is that you have put yourself in a position where you are not entitled to certain government help and benefits.
On the other hand, it is highly likely that the tax and NI savings you have made far outweigh the amount of money you look like foregoing from government assistance not received.
If you register your company for PAYE I am pretty sure that the "credits" you start building up only start from the date you register.
Whatever about the past, I think you should start looking at some form of contribution to the system so that you start building up a decent contributions record. You need this for your future State Pension.
On the other hand, it is highly likely that the tax and NI savings you have made far outweigh the amount of money you look like foregoing from government assistance not received.
If you register your company for PAYE I am pretty sure that the "credits" you start building up only start from the date you register.
Whatever about the past, I think you should start looking at some form of contribution to the system so that you start building up a decent contributions record. You need this for your future State Pension.
Check the timings carefully.. to qualify for SPP (Don't panic too much, it's only about £130/wk if you are taking a minimal salary)
"[the employee] have worked for you continuously for at least 26 weeks by the end of the 15th week before the expected week of childbirth (known as the ‘qualifying week’)"
However, I don't believe you both being unemployed should exclude her from receiving MA:
https://www.gov.uk/pay-leave-for-parents
"[the employee] have worked for you continuously for at least 26 weeks by the end of the 15th week before the expected week of childbirth (known as the ‘qualifying week’)"
However, I don't believe you both being unemployed should exclude her from receiving MA:
https://www.gov.uk/pay-leave-for-parents
Eric Mc said:
On the other hand, it is highly likely that the tax and NI savings you have made far outweigh the amount of money you look like foregoing from government assistance not received.
On the contrary Eric. If I was looking to minimise my overall tax bill then paying myself a salary and associated PAYE and NIC is the way to go. The consequent reduction in profitability and CT liability outweigh the increase in PAYE/NIC. This is why most contractors take this route. I on the other hand, as stated in my OP, am too lazy to set up the PAYE, and happy to pay the extra CT.By the way, I pay far more tax overall as a contractor than I ever will as a permie.
Thanks again.
MoelyCrio said:
On the contrary Eric. If I was looking to minimise my overall tax bill then paying myself a salary and associated PAYE and NIC is the way to go. The consequent reduction in profitability and CT liability outweigh the increase in PAYE/NIC. This is why most contractors take this route. I on the other hand, as stated in my OP, am too lazy to set up the PAYE, and happy to pay the extra CT.
By the way, I pay far more tax overall as a contractor than I ever will as a permie.
Thanks again.
Can't really see how that might be. Assuming you would be a higher rate taxpayer as well. Have you factored in the Employer's and Employee's NI as well?By the way, I pay far more tax overall as a contractor than I ever will as a permie.
Thanks again.
All you have to do is look at what you paid in total under your current set up ( i.e. Corporation Tax and Income Tax only) compared to what you would have [paid if you had gone down a salary route (PAYE, ER's and EE's NI) and Corporation Tax.
If you haven't been saving tax and NI you must be doing something wrong.
Did you ever think perhaps of paying Class 3 Voluntary NI? It's not really the "correct" way for directors to make NI contributions but I know a number of people who do this.
k permanent staff is bad. I'm praying for the oil price to go up next year so I can say bye bye to this permanent staff hell. Eric Mc said:
None of the above.[
You are not employed - because you do not draw a salary from your own company. Indeed, you have not even registered your company as an employer - so you have doubly emphasised this.
...
You are not self employed because you have not set up your trading operation as a sole trader.
...
This is a good example of well intended but inaccurate advice.You are not employed - because you do not draw a salary from your own company. Indeed, you have not even registered your company as an employer - so you have doubly emphasised this.
...
You are not self employed because you have not set up your trading operation as a sole trader.
...
It is possible for someone to be an employee even if only paid by some indirect method such as dividends. Registration is irrelevant - the question is whether the relationship is in fact one of employment.
The suggestion that a person can only be self employed if he or she is a sole trader is also incorrect. Partners in partnerships are self employed. A person can run a business through a company or LLP and still be self employed.
There are no magic tests here - all depends on individual circumstances.
MoelyCrio said:
...
My partner would have been entitled to SMP, but shes having to give up work early for other reasons. If I wasn't around (or I was unemployed) she would be entitled to MA. It seems a quirk that MY lack of recognised employment status disqualifies HER from MA as its the only benefit she's ever had (or not had thanks to me!)
I have only just noticed this comment, and now wish I hadn't given the OP any free advice! My partner would have been entitled to SMP, but shes having to give up work early for other reasons. If I wasn't around (or I was unemployed) she would be entitled to MA. It seems a quirk that MY lack of recognised employment status disqualifies HER from MA as its the only benefit she's ever had (or not had thanks to me!)
The comment may win the prize for the most PH comment of the year. In summary: "I am a company director (powerfully built or otherwise) and have arranged my affairs so as to reduce my tax, but now I am getting all arsy because the State isn't subsidising my partner".
Delightfully entitled!
Breadvan72 said:
I have only just noticed this comment, and now wish I hadn't given the OP any free advice!
The comment may win the prize for the most PH comment of the year. In summary: "I am a company director (powerfully built or otherwise) and have arranged my affairs so as to reduce my tax, but now I am getting all arsy because the State isn't subsidising my partner".
Delightfully entitled!
That kind of crossed my mind as well - but I was trying to be a bit more diplomatic.The comment may win the prize for the most PH comment of the year. In summary: "I am a company director (powerfully built or otherwise) and have arranged my affairs so as to reduce my tax, but now I am getting all arsy because the State isn't subsidising my partner".
Delightfully entitled!
I am well aware that "partners" in partnerships are, in essence, "self employed". I've handled enough partnerships over the years. But it wasn't pertinent to the OP's question and I didn't want to embark on all the nuances of employment/self-employment status.
I attended a lecture last year hosted by an employment lawyer and she said that after over 100 years of legal cases and legislation, defining somebody's employment/self employment status can still be problematic.
As you say, circumstances surrounding each individual case need to be taken into account - which makes giving general advice very tricky.
MoelyCrio said:
Eric Mc said:
Sounds like she may have to forego the Child Benefit too.
Child benefit was removed from higher rate tax payers some years ago Eric. It can either be stopped at source or declared and paid at 100% taper tax via SA.Or are you still trying to make some kind of point?
Many, many people who are higher rate taxpayers can legitimately retain their Child Benefit. People don't lose the benefit because they are Higher Rate Taxpayers. They lose SOME of the benefit if an individual in the household earns between £50,000 and £60,000 and they lose all of it if the individual earns over £60,000. People currently start paying Higher Rate tax at £42,385 (including the annual Personal Tax Allowance) - so they can be Higher Rate Taxpayers and not lose the benefit.
Also, making personal pension contributions can defer the point where both the Higher Rate tax starts being charged AND the Child Allowance starts being reclaimed.
MoelyCrio said:
I never said she was my business partner. Shes my partner as in my girlfriend and betrothed!
Anyway, its all irrelevant as the entitlement to MA is based on the mothers NICs and nothing to do with any persoanl partner they may have. Which makes sense.
Anyway, as you were...
I assumed from the outset that the partner you referred to was your life partner and not your business partner. This does not improve your position, or make me more inclined to think that you are the most socially engaged dude out there. It appears that you are keen to minimise your contribution to the State, but you want the State to contribute to your family group. Bit Council?Anyway, its all irrelevant as the entitlement to MA is based on the mothers NICs and nothing to do with any persoanl partner they may have. Which makes sense.
Anyway, as you were...
"As you were" is another classic PH-ism. It usually means "You have come up with something to which I have no answer, or which is in some way inconvenient to my theme, but I will just say something bluff and vaguely Clarksonish in response". Quality PH'ing!
Gassing Station | Jobs & Employment Matters | Top of Page | What's New | My Stuff