Working out the employment status of someone who is employed or self-employed can sometimes be surprisingly complicated. In this post we’ll explain examples where a worker’s employment status might be confusing, and how to identify it correctly.
Employee or contractor?
The official stance from GOV.UK is that “an employee is someone who works under an employment contract”. Confusingly though, this can also apply to self-employed contractors who have a contract in place with their client. If a business uses a self-employed contractor, are they considered an employee of the business or self-employed?
Employment status in this case partly depends on the working arrangements. If a contractor is brought in to work set hours that they have no control over, no flexibility, and a rigid contract, then they might actually be an employee. Contractors tend to have far more autonomy than an employee.
Making a mistake with this could mean a worker missing out on employee benefits they’re entitled to, or even falling foul of IR35 disguised employment rules. IR35 is a law that aims to cut down on instances where a contractor is an employee in all but name. Because determining the work status of a contractor can be so complicated, HMRC provide an online tool to help employers get it right.
Employee or director?
The director of a limited company is what’s known as an office holder; someone who doesn’t necessarily have an employment contract, but has been appointed to the position. This means that someone who is the director of their own limited company is treated as an employee for tax purposes.
Why employment status matters
It’s vital to clarify employment status, because it affects the way that tax is collected and the rate of National Insurance that applies.
While income tax will be the same rate, National Insurance has different classes for employees and the self-employed. Employed people will be subject to Class 1 National Insurance whereas self-employed people will be subject to Class 2 and Class 4.
The way that tax is collected is also different for employees versus self-employed workers. Employees are usually taxed at source, with their employers using PAYE to pay the deductions to HMRC on their behalf.
Self-employed people are responsible for themselves when it comes to telling HMRC how much they have earned, and therefore how how much tax they owe, via Self Assessment.