It is essential to know if you are employed or self-employed for many reasons. These include knowing your employment rights, such as in redundancy, and your liability to pay income tax and National Insurance. In general, the self-employed are responsible for paying their own tax and National Insurance through self-assessment, whereas employees pay taxes and National Insurance via their employer through PAYE.
If you are an employee tax is automatically deducted from your payslip every month. 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 are an employee, you won’t usually have to deal with HMRC unless:
- You believe your tax code is wrong or you are contacted by HMRC
- You want to claim expenses for professional subscriptions, tools or working from home,
- You have several jobs/pensions or other sources of untaxed income (eg income from renting your property).
- You are self-employed as well as employed
In these circumstances, you may have to fill in a self-assessment tax return
If you are self-employed you will normally:
- Be raising invoices
- Be providing your own tools
- Be responsible for completing the work correctly and at your own risk, with or without assistance provided by yourself.
- Being in partnership means that you are self-employed jointly with one or more other individuals and have agreed to share work and responsibilities.
You will need to pay tax and National Insurance and to do that you will need to report your earnings to HMRC so that your tax can be calculated. You will need to keep records and report your earnings through Self Assessment.
Subcontractors in the Construction Industry are self-employed but have special rules and have tax deducted from their pay. They should receive payslips or tax certificates. 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.
Employed and Self-Employed
If you are employed and self-employed at the same time, you will be both paid through an employer and work for yourself.
You may have to pay class 1 National Insurance as an employee as well as class 4 National Insurance as a self-employed person, though there are lower and upper limits for contributions, which should be calculated through the Self Assessment process. How much you pay is based on the normal National Insurance rules for employees and the self-employed. There is information about this on the Gov.uk website at https://www.gov.uk/national-insurance/how-much-you-pay. Class 2 NI is abolished from April 2024.
What if you and your employer disagree about your employment status?
If your work relationship has the hallmarks of employment, then your employer is responsible for making 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 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.
Things to remember
- You can be both employed and self-employed at the same time.
- If you are a sub-contractor in construction you are self-employed and your main contractor should give you a certificate weekly or monthly showing tax paid on your earnings. You should make sure you receive these as it is much harder to get them later.
- If you work through an agency, their paperwork will explain how you are paid, it could be with a salary, the same as an employee. Or there could be a dividend with the salary. You might be working for your own or an umbrella company, or there might be another arrangement. Make sure you understand the paperwork, because if the agency doesn’t complete the right forms or pay the right tax you may still have to pay the tax owed, penalties and interest.
