Business minister Paul Scully is trying to find ways of protecting business owners who pay themselves through dividends during the coronavirus crisis.
Such businesses are currently not covered by the Treasury aid programmes.
The Financial Times reported that Scully, whose portfolio covers the UK’s small businesses, is looking for solutions to cover such firms.
Chancellor Rishi Sunak has opposed providing help to such companies.
Sunak has said that those who pay salaries using dividends pay a lower amount of tax and therefore should not be eligible for the government’s support.
The tax rate on dividends is 7.5 per cent, rather than the usual 20 per cent level of income tax.
The decision has come under scrutiny from many firms who pay through dividends, with around 2m such owner-managers currently excluded from government help according to the Institute for Fiscal Studies.
Scully, who used to pay himself in dividends during his business career, said that he wants to get money to those falling between the cracks of government schemes as soon as possible.
Such business owners are technically eligible to use the government’s job retention “furlough” scheme, but as many pay only small salaries and top the rest up through dividends it could have a limited impact.
Alasdair Hutchinson, policy development manager at the Association of Independent Professionals and the Self-Employed, said that one solution would be to include dividend income in the scheme:
“It is very welcome that Mr Scully is looking at ways to plug the gap for company directors. One way to do this would be to include dividend income in the government’s Job Retention Scheme, which company directors are eligible for but only for the small portion of their earnings that comes from PAYE.
“This would enable many limited company contractors who pay themselves through dividends to make full use of the scheme.
Business groups welcomed the move. Edwin Morgan, policy director at the Institute of Directors, said:
“We’ve been highlighting the issue for weeks, so we’re pleased that the business minister is sympathetic to the need for support for company directors that have been left out in the cold. The government has made much of its backing for entrepreneurs, but too many have been missing out on the existing measures.
“It’s common for directors of the smallest firms to use dividends for income, it’s more flexible and means they can keep money inside the business to keep it going if needs be.
“Government has pointed to difficulties in accounting for this income, but there are ways of providing evidence. Even if the system has to have more hoops, that shouldn’t get in the way of it being set up.”
Neil Carberry, chief executive of the Recruitment and Employment Confederation (REC), said: “Small businesses will drive our recovery and it’s important to protect owner-operators for that to happen.
“We welcome Paul Scully’s response to the issues that have been raised by the REC and others.”