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Employed or self employed?

Posted on 21st April 2016

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The question as to whether someone is employed or self employed is not as straightforward as it might at first appear. Many people assume they are free to choose, but this is not the case.

How do you decide?

Although there is no clear-cut answer to this question, the main areas which need to be considered are as follows:

  • Ultimate control of the work
  • Profit element, and risk of loss
  • Provision of materials and equipment
  • Integration with the employer’s business
  • The intention between the parties
  • Substitution
  • Mutual Obligation

During the recession it may be tempting to cut payroll costs by engaging former employees as self-employed contractors, but there are risks associated with this and the correct position is not a choice.

For HMRC to accept the self-employed status it should be evidenced that:

  • The worker operates a business assuming risks such as rectifying work, invoicing and waiting for payment;
  • The worker is not required to work for a particular engager,
  • The engager is not obliged to use that worker’s services,
  • The engager does not have the right to control what the worker does; and
  • The worker could send someone else in his place to carry out the work.

What are the practical differences?

Employees are taxed under the PAYE system and are liable to Class 1 national insurance (NI) contributions. If the worker is an employee, the employer also has to pay Class 1 NI over a limit set each year, the employee’s NI rate reduces to 2%, but for employers, NI continues at the full rate, with no upper limit. The employer also assumes responsibility for paying statutory payments such as statutory sick pay and statutory maternity pay.

Employees have rights under health and safety and employment laws, such as the rights to redundancy payments and not to be unfairly dismissed. Moreover, the range of social security benefits is greater for employees than for the self employed.

Self employed workers are taxed under self assessment, and are allowed more scope in claiming expenses. They also pay Class 2 and Class 4 NI contributions, the combined burden of which is lower than Class 1 NI. Their ‘employers’ are not subject to NI.

It is not surprising; therefore, that many businesses show a marked preference for self employment status for their workers!

What if you are wrong?

It is the responsibility of the person making the payment to get it right. If you treat a worker as self employed and he or she is subsequently ruled to be an employee, you could find that all the payments you have made will be treated as net payments, and you will have to pay the corresponding tax and employees’ NI, as well as the employer’s NI.

You may also have to pay interest and penalties for incorrect returns.

For more information or advice please email:

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