Am I Employed or Self-Employed?

If you’re struggling to determine your own or somebody else’s employment status, don’t worry, it isn’t you – it can be complicated!

We’ll take a look at employment, self-employment and everything in between, so you know exactly where you stand, and whether you should be declaring your income to HMRC.

Am I an employee or a contractor?

GOV.UK state ‘an employee is someone who works under an employment contract.’ While that sounds great, it isn’t that clear cut – because a self-employed contractor would also have some type of contract with their client.

It all boils down to your working arrangements. Are your working hours flexible? Can you come and go when you please? Are you setting your own rates? A contractor often has far more autonomy than an employee, who tends to get less of a say on where they work, when they work, and how much they’ll be paid.

Why is it important to identify my employment status?

It’s vital to clarify employment status, because it affects the way tax is collected and by whom, and even the rate of National Insurance which applies.

 

Different types of National Insurance

 
While income tax is based on the amount of earnings you receive in a year, there are different types of National Insurance for employment income and self-employed profits. It looks like this:

  • Employees pay Class 1 National Insurance
  • If you’re self-employed you’ll pay Class 2 and Class 4 NI on your profits

 

What you’re entitled to

 
Mistaking yourself for a contractor when you’re actually an employee could cost you. This is because contractors don’t receive the same benefits as employees, such as annual leave entitlements or sick pay. It’s also much easier for someone to end your contract if they no longer need your services.

 

The way tax is collected

 
The way tax is collected is also different for employees versus self-employed workers. Employees are ‘taxed at source’, which literally means they’re taxed at the source of their income, with their employers deducting tax and NI from their pay and sending it on to HMRC.

It’s up to self-employed individuals to take responsibility for their own taxes, submitting a tax return to declare how much they’ve earned and how much they spent.

This is a major area for contractors, thanks to a section of the tax rules known as IR35. We’ll give it a section of its own.
 

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What happens if I’m inside IR35?

IR35 is an area of tax compliance which deals with people who work for a client through their own limited company, but would otherwise be an employee if the company didn’t exist.

If you’re ‘inside’ IR35 it means that the way you’re working is rather like an employee but disguised as a contractor. You’ll sometimes hear IR35 described as ‘disguised employment’ for that reason.

Being inside IR35 also means that the person who hires you is responsible for deducting National Insurance and income tax from your pay each month, just like they would if you were an employee on their payroll. Despite that, you still won’t have the same benefits as an actual employee – like holiday pay or redundancy pay.

It’s completely normal for a contractor to have contracts both ‘inside’ and ‘outside’ of IR35 at times – just make sure you have proof of status!

How do I know if I’m inside IR35?

The very first point is that sole traders don’t fall under IR35 legislation, so you’ll only need to have it on your radar if you work for clients through your own limited company. So what’s next?

Do you feel like you’re an employee in disguise? While it may seem like we’re asking whether your colleagues and managers ignore you (that’s one for your therapist, or your Mum), we mean are you literally a contractor who appears to be an employee in every sense of the word, apart from the actual word itself.

For example, if someone were to come in and shadow you for the day, would they see any distinction between you and an actual employee? Would the other staff who work there know you’re a contractor if you hadn’t told them?

 

Determining your IR35 status

 
It’s important to know who needs to determine your IR35 status. In most cases it will be the company that’s hired you, unless they hit 2 out of the 3 points below. If they don’t, it’ll be up to you to determine your IR35 status:

  • They have an annual turnover of £10.2 million or less
  • Their balance sheet total is £5.1 million or less
  • They have 50 employees or less

 
If they don’t meet two of the criteria above, it’s up to you to determine your status – but you don’t need to rely on taking a cheeky guess and hoping for the best. You can take a look at HMRC’s CEST (Check Employment Status for Tax) tool to determine whether you’re inside or outside IR35.

If I’m a contractor, how do I pay taxes?

Being a contractor isn’t actually a legal business structure, so you’ll need to do some research to work out what kind of business structure is best for you. The way you decide to set up your business will determine what you need to do in terms of taxes.

 

For instance, if you choose to be a limited company, you’ll need to submit Company Tax returns and pay Corporation Tax on the business’s profits. Then, depending on how you pay yourself from the company, you might need to set up PAYE if you take a salary through payroll, register for Self Assessment if you receive dividends (or do both!).

Completing taxes can be totally overwhelming, and you may want to have your own freedom as a contractor, without the tax faff. It’s why some contractors choose to work through an umbrella company.

In effect, the umbrella company ‘employs’ you and pays you through payroll like a PAYE employer would – whilst still leaving you with the freedom to pick and choose the work you want, and the hours – without needing to sort your taxes out!

 
To find out how Pandle can help if you or your clients are self-employed, explore our features.


Elizabeth Hughes

A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible.


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