Employment v Self employment

An individual’s employment status has a significant impact on their tax position and on how tax is paid, as well as on the reliefs that they can claim.

Employees have income tax and primary class 1 national insurance contributions (NICs) deducted from their pay by their employer through the ‘Pay As Your Earn’ (PAYE) system. The self-employed submit annual tax returns and pay income tax and NICs (class 2 and 4) through the self-assessment system.

Employment status is relevant for employment law purposes as well as tax purposes. There are many implications of this, but it means that an individual who is employed has an entitlement to holiday and sick pay, but if they are self-employed, they will only get paid for the work they do.

In the UK economy today, being self-employed is an attractive option for many due to the greater flexibility it offers. For employers, there is a tax saving incentive associated with having a self-employed work force as they do not need to account for secondary class 1 NICs.

An individual may be offered work and asked if they want to work on an employed or a self-employed basis. However, the position is generally not that straightforward and it is important to consider the facts and the actual terms of the employment engagement. There are financial risks for both the employer and the employee if the employment status is incorrect.

An individual’s employment status depends on a number of factors.

Control

A self-employed individual is likely to be in control of the work done. However, an employer controls ‘what’, ‘how’, ‘where’ and ‘when’ work is done.

Substitution

Under an employment relationship, it would be extremely unlikely that an employee would have the right to appoint a substitute to undertake their work. However, a self-employment relationship may include the right to either sub-contract work or bring on board additional assistance.

Mutuality of obligation

An employment contract will include mutual obligations. The employer is obliged to offer work and the employee is obliged to undertake that work. However, a self-employed individual is free to accept or decline work.

Provision of own equipment

The self-employed would generally supply their own personal equipment, but an employee would expect to be provided with this.

Financial risk/reward

The self-employed bear financial risk and may make a loss (or a profit) from an assignment. The employed will only face financial risk where their work relates directly to a bonus or commission scheme.

‘Part and parcel’ of the organisation

A self-employed individual is unlikely to be fully integrated into an organisation and will not have the same responsibilities or privileges as an employee.

Nature of individual’s business

Factors including advertising for clients, having a website and doing own billing may indicate self-employment.

This is a complicated area with adverse financial consequences if it is determined by HMRC that an individual’s employment status is incorrect. Please get in touch if you have any queries regarding your employment status.