Employee tax codes and National Insurance

Employees are workers who work for other businesses, rather than being in business themselves. They have income tax and National Insurance deducted from their pay by their employer before they get it, through a system called PAYE (Pay As You Earn). Employees have certain rights, for example to holidays, sick pay, and a basic minimum wage. From a tax point of view there are some key things you need to know. First of all you need to be certain that you are an employee. You also need to know about PAYE and tax codes and you need to know what to expect from your employer. The following pages will look at:

• If you are not sure that you are an employee
• PAYE and tax codes
• What to expect from your employer

You can find out more about employment:

• on the Gov.uk website at https://www.gov.uk/browse/working

If you are not sure that you are an employee

For tax purposes, workers are either employees or they are self-employed. It is important to know which you are because as an employee your employer is responsible for collecting and paying your tax and National Insurance, but as a self-employed person you would have to pay your tax and National Insurance yourself – and you would need to register with HMRC to do this.

Being employed is a matter of fact, not of choice. You, or your employer, cannot simply choose for you to be an employee or self-employed – your status is based on the conditions of your work. If you are an employee you should:

• Get payslips
• Have tax and National Insurance deducted from your pay
• Have to do the work yourself – you couldn’t send anyone else in your place
• Normally work set hours for an agreed hourly rate
• Be eligible for overtime
• Have everything you need for your work provided by your employer

If you have any doubt about whether you should be treated as an employee or as self-employed, you should look at the Gov.uk page on employment status.

What to do if you and your employer disagree about your employment status.

If your work relationship has the hallmarks of employment, then your employer is responsible to make a decision about your employment status. If they fail to treat you as an employee HMRC can require them to pay the tax and NIC that they should have taken from you, but did not.  They may also be liable to significant penalties.

Unfortunately however, sometimes the employee can be exposed to additional tax bills and penalties. This can apply where:

• Your ’employer’ has encouraged you to contact HMRC and register as self-employed, and you have done this
• You are an employee and either all or some of your income has not had the correct tax deducted, and HMRC considers that you knew that tax was not being correctly deducted

If either of these cases applies, you should seek professional help. If your income is under £20,000 pa you may contact the TaxAid helpline .

If you disagree with an employer’s decision you have little option except to discuss your status with them.  If they have not done so already, you could ask them to review the information on the Gov.uk website, or they may be willing to take professional advice on the matter.