Dear Contractor Doctor,
My contractor limited company has been getting very little work as a result of the current economic downturn.
As a result, I have been receiving Jobseeker’s Allowance when I am between contracts, and not claiming when I am working on a contract.
Should I be claiming Jobseeker’s Allowance if I have my own limited company? Are the benefits I receive going to cause me problems at the end of the tax year?
ThanksTJ
Contractor Doctor says:
Trading as a limited company contractor has many advantages but it can also mean less financial stability when demand for your services is low. If you’re short on work and income, you might want to consider applying for Jobseeker’s Allowance (JSA) which can provide some short-term relief, providing you meet certain criteria.
JSA is designed to be a temporary measure to help people without work to get back on their feet and find a job. This is equally true whether you are:
- A limited company contractor
- In a partnership
- Self-employed
However, there are strict rules regarding eligibility for JSA and you must meet a range of conditions before you qualify. The allowance is also counted as taxable income and so it will impact on your tax affairs, though it is easily accounted for.
Can limited company contractors claim JSA?
The short answer is yes, a limited company contractor who is a company director and shareholder can claim JSA. However, you must first meet the eligibility requirements and ongoing conditions in the ‘Claimant Commitment’ that has been agreed with Jobcentre Plus, which administers the JSA scheme.
The terms set out in the Claimant Commitment depend on circumstance and will be unique to each individual, but its basic function is to ensure that the person claiming JSA is going to sufficient lengths to find work.
Do limited company funds have a bearing on a claim for JSA?
It’s important to remember that your limited company’s business assets will be considered ‘capital’ and added to your personal assets and capital when you are means tested for your JSA claim. Unless the combined funds and capital held both in the business and personally fall below £16,000, you will not be able to claim JSA.
In addition, if you regularly receive dividends in large sums from your limited company, these and any cash in the business will be considered part of your savings limit of £16,000.
Because of this, Jobcentre Plus will want to see detailed company accounts and financial records, and may wish to access your accountant when carrying out eligibility assessments. Should you be operating as a sole trader or in a partnership, business assets will not be considered as part of your savings or capital.
Is income received from JSA taxable?
Although it is a state benefit, JSA is still taxable income, as HMRC confirms in its Employment Income Manual. However, in certain circumstances – for example, should you claim the JSA premium for a dependent child - not all JSA is counted as taxable income. HMRC provides guidance to calculate how much JSA is taxable.
As a result of this, you will find that having claimed JSA as taxable income in a given tax year does complicate your tax affairs. But this needn’t cause problems as long as you ask your accountant to take JSA payments into account when completing your personal tax return.
The good news is that you don’t have to shut down your limited company with all the attendant costs and hassle. That’s because you can continue to earn a small amount in addition to your benefit payments, although earnings above a certain threshold will be deducted from your weekly JSA payment.
Don’t leave yourself vulnerable to fluctuating demand
JSA can provide temporary relief for contractors impacted by volatile market conditions, but as a source of income it pales in comparison to contracting. If possible, you should retain money earned during busy spells within your limited company that can be called upon at a later date to help manage peaks and troughs in demand.