As the person paying the worker, it is your responsibility to decide if the worker is an employee. If you get this wrong and operate their taxes incorrectly, you could be responsible for paying the tax you should have paid for your employees, plus interest and penalties.
Workers could be:
- Employees: You are responsible for deducting and paying the tax and National Insurance of your employees through their wages. Your employees also have other rights and you have more responsibility as their employer.
- Self-Employed: They are responsible for their own tax and National Insurance, you might pay them by the hour or the day, and they will usually send you an invoice to pay them for their work.
- Workers covered by special schemes: This includes agency workers, managed service companies and workers in construction.
- Personal care workers and similar: This includes people who work in your home providing personal care or other services.
There is a lot more to being an employer than just tax. So if you need to know more about being an employer, a good starting point is the gov.uk website page – Employing people https://www.gov.uk/browse/employing-people
How to tell if your worker is self-employed or employed?
Even if a worker is registered as self-employed with HMRC it does not automatically mean that their contract with you is as a self-employed worker, it depends on the nature of the working relationship.
A key distinction is whether the contract between you and your worker is a ‘contract of service’ or a ‘contract for service’.
- Contract of service: You pay them to do what you want, with your equipment, when and where you want it done. Often the work set hours are determined by you. They get holiday allowance and other employee benefits
- Contract for service: You pay them for the result of their work, and they are responsible for how they achieve it. They will often work with their own equipment and to their own schedule and hours. Often they are working with more than one business or individual to provide their service.
Often arrangements fall somewhere between these two and it is important to look at all aspects of the working relationship to make this decision.
Creating a legal document or contract which outlines the terms of the working relationship will help you to set out the rights and responsibilities of both parties, as long as this is agreed upon and followed during the course of work.
In the construction industry
In this industry, you still need to decide if your workers are employed or self-employed. If they are employees, then the normal PAYE rules apply.
But if you decide your workers are self-employed, then the special Construction Industry Scheme (CIS) applies. This is where anyone who pays self-employed workers in the construction industry must register under this scheme. It usually means that you have to deduct 20% of income tax from your worker’s pay.
See our pages on CIS subcontractors and construction industry tax here.
Other special rules
There are also special rules for other particular occupations such as:
- Divers
- Agency workers
- People who work through their own limited company
- Actors and entertainers
- Teachers and instructors
You might need to seek professional tax advice in such cases. You can find some information on the HMRC website here: http://www.hmrc.gov.uk/employment-status/index.htm#3
Working for your own limited company
If you work for your own limited company, then your company is your employer. In this case, you are usually the director of the company and so are responsible for registering the company as an employer. Any salary or benefits that you have will need to be taxed and processed under PAYE. Company directors normally have to complete tax returns.