As a contractor, should I place myself on furlough?

Points for contractors to consider before claiming via the Job Retention Scheme

A staggering 8.4 million people in the UK are currently ‘on furlough’, as businesses of all sizes make use of the government’s Coronavirus Job Retention Scheme (CJRS).

Under the scheme, which launched in March, the government pays 80% of an employee’s salary up to a maximum of £2,500 a month, as the government looks to protect workers, businesses, and the economy.

The Chancellor of the Exchequer, Rishi Sunak, recently announced that this initiative will remain in place until the end of October, at a predicted cost of £80bn. However, the amount contributed by the government will decrease, with businesses to pay 10% of its costs from September, rising to 20% in October.

Even so, the extension to the CJRS matters because freelancers and contractors, who are employees of their personal services companies, may be eligible to claim.

In this article, we’ll explore a number of key considerations to help you decide if placing yourself on furlough and claiming is right for you and your business. 

Dividends aren’t counted

While the Job Retention Scheme works well for employees, it has been criticised for not catering to contractors’ needs.

The issue is, the government contributes 80% of Pay As You Earn (PAYE) income only. Dividends aren’t counted. And because contractors usually pay themselves a low salary before drawing most of their income in the form of dividends, many independent professionals aren’t eligible to receive anywhere near the £2,500 that employees can. For example, many contractors pay themselves a salary of £732 per month, so qualify for just 80% of that (£585.60).

You can’t work on furlough

Under the current furlough rules, you aren’t allowed to provide services to clients with a view to generating revenue for your business. That’s not to say you need to down tools entirely, though. Government guidance does take into account business-critical duties that freelancers and contractors, as owner-directors of their company, may need to carry out:

“Where furloughed directors need to carry out particular duties to fulfil the statutory obligations they owe to their company, they may do so provided they do no more than would reasonably be judged necessary for that purpose, i.e. they should not do work of a kind they would carry out in normal circumstances to generate commercial revenue or provides services to or on behalf of their company.”

The above suggests that placing yourself on furlough (which you must do for a minimum of three consecutive weeks) isn’t a decision that should be taken lightly.

Scheme extended, but costs will be shared

The Job Retention Scheme has been extended until the end of October, with businesses to start contributing to the costs. From August employers will be required to contribute employer’s National Insurance and pension contributions. From September, employers will also be expected to pay 10% towards wages, increasing to 20% in October. This suggests that contractors working through their own limited companies will need to pay towards it themselves. 

Part-time furloughing allowed

Information is expected to land soon that outlines how those on furlough can return to work part-time from July. Although, given the unique circumstances that contractors find themselves in, how this would work in practice remains to be seen.

Cut-off date announced

With businesses beginning to reopen, Rishi Sunak revealed the scheme will stop accepting new applicants on 30th June, with the final three week furlough before that point to start on 10th of this month. This means contractors thinking about furloughing themselves may need to decide sooner rather than later.

While the Job Retention Scheme does extend itself to freelancers and contractors, as you might have gathered from this article, it arguably isn’t designed for the specific needs of independent professionals.

However, it may still prove vital to you, and your SJD accountant would be delighted to answer any questions you might have regarding this support and any of the other Coronavirus help available such as bounce back loans and delays to tax payments.

For a full updated list of all the support available to you, please visit our Coronavirus Business Support for PSCs page.