Employed or Self-employed?
When you engage someone to do work for you first of all you have to decide whether this person is an employee or self-employed. It is up to you to get this right and failure to do so may lead to you having to settle liabilities in tax and National Insurance that you should have deducted from your employee’s pay.
There is no legislation to distinguish between employment and self-employment, but numerous cases decided in the courts have provided guidance as to the indicating factors.
Deciding employment status
Factors indicating employment
• Having to carry out the work personally;
• Being told what to do, when and how to do the work;
• Payment by the hour, week or month and eligibility for overtime pay;
• Working set hours, or a given number of hours per week or month;
• Working at the other party’s premises, or at a location of the other party’s choice;
• Being part and parcel of the organisation;
• Right of dismissal;
• Mutuality of obligations (to provide work on the one hand, and to carry out that work on the other);
• Receipt of employee benefits such as holiday pay, sick pay or a company car;
• Long periods working for one party.
Factors indicating self-employment
• The ability to exercise control over the work carried out;
• Financial risk;
• Responsibility for meeting losses as well as taking profits;
• Provision of equipment needed to do the job (as opposed to the small tools that many employees provide for themselves);
• Freedom to hire other people on the individual’s own terms to do the work taken on (and payment out of own funds);
• The requirement to correct unsatisfactory work in the individual’s own time and at his own expense;
• The opportunity to profit from sound management.
None of these factors are decisive in themselves. It is necessary to look at the circumstances as a whole. Where the evidence is evenly balanced, the intention of the parties may then decide the issue.
HMRC provide an online status tool on their website at www.hmrc.gov.uk/calcs/esi.htm. If used correctly, HMRC will recognise the decision given by the tool.
What are the consequences if you get this wrong?
If you are paying someone to do the work for you it is your responsibility to get the employment status right. If you treat a worker as self-employed and it is subsequently ruled that he/she is in fact an employee, all the payments you have made to the worker will be treated as net payments. This means that you will have to pay all corresponding tax and employees’ and employers’ NI, which you will not be able to recover from the employee.
Treatment of Employees and Self-employed for tax and NI purposes.
Employees are taxed under the PAYE system and are liable to Class 1 National Insurance contributions at 11% between primary threshold and upper earnings limit, reducing to 1% on earnings above the upper threshold (£844 per week). Employers are also liable to pay National Insurance. The rate is 12.8% and for employers there is no reduction on earnings above the upper threshold. Employees are also entitled to statutory sick pay and statutory maternity pay.
Self-employed workers are taxed under self-assessment rules. Generally a self-employed worker will have more scope to claim business expenses than an employee thus reducing their tax liability. Self-employed pay Class 2 (£2.40 per week) and Class 4 NI at 8% on the earnings between lower profits limit and upper profits limit, reducing to 1% on earnings above the upper profits limit (£43, 875 per year).
Income tax rates are the same for both employees and self-employed.
If you need further information on this subject please feel free to contact us.