Am I self-employed, employed, both or neither?
Does my work status matter?
Yes! It can be surprisingly difficult to define your employment status as either employed, self-employed, both or neither. It is hugely important because it affects how much tax and National Insurance Contributions you pay. The payment process also differs, depending on your employment status.
The onus is on you to clarify which category you are in to ensure you are paying the correct amount of tax and that you are claiming all your available tax reliefs.
Is my work status a legal thing?
There is no clear, legal definition to establish what is ‘self-employed’ and ‘employed’. The courts have gradually compiled a list of some situations which are definitely one or the other, but this does not extend to all employment circumstances. This doesn’t mean that you are free to choose your own status; it is always dependent on the application of particular factors. It does mean that there is a blurry line separating ‘self-employed’ and ‘employed’ into which some people’s circumstances fall.
Be aware!
This ambiguity can be exploited by employers who may try to save money by avoiding the PAYE system and treating their employers as self-employed when they should be classed as employed. You should always be certain of the employment status of a job before you start work.
Be wary if you are given the choice to be self-employed or employed, or if someone you feel you are working for describes your role as self-employed. If your employer is not using PAYE system then you become liable to pay the tax on your income. If you are unsure of the business you are working for then discuss your status with them and you can always contact HMRC directly if you are still suspicious.
What work status could I have?
When deciding your employment status, there are four main categories you may fit into.
- Working – any paid work that is not a favour or hobby.
- Training – you are not paid in this role, but you may have expenses reimbursed.
- Volunteering.
- Miscellaneous paid work – this usually applies to one off jobs, that are not determined as being employed or self-employed.
Each of these categories has its own rules, with the ‘working’ section being subdivided into ‘self-employed’ and ‘employed’. We will now go on to give the basic details for each section.
Our tax regulations are complicated and this guide is designed to simplify things enough for you to define your own work position. It does not deal with the entirety of the tax rules and many taxpayers consider it wise to seek help from a tax professional or HMRC.
Working status
A ‘best fit’ approach is taken when determining whether you are employed or self-employed. The table below lays out different financial factors in the left hand column and, in the following two columns, how they look if you are self-employed and employed respectively. Whichever column has the majority of indicators that apply to you is probably your employment status.
| Self-employed or employed – indicators | ||
| Financial indicator | Self-employed | Employed |
| How you are paid | You invoice the client for the work when it is completed. | You are paid a regular weekly or monthly wage. |
| Who controls how you do your work? | You establish the standard that you are going to meet with the client and then get on with the work yourself. | Your work is supervised. |
| Where do you do your work? | You can choose where to work, within the obvious restrictions of the tasks involved. | Your employer determines your workplace. |
| When do you do your work? | You choose your own working hours as long as you meet pre-agreed deadlines. | You work for a certain number of hours at times set by your employer. |
| Benefits/rewards/perks | Any rewards are usually a cash or cheque bonus from a client, rather than ‘in kind’. Occasionally a barter of services is arranged between business people for their mutual benefit. | You may receive a cash bonus, vouchers, shares, subsidised meals or a company car as work benefits. |
| The actual work itself | You do the job that you and the client agreed to, with any changes requiring renegotiation. | Your employer can move you between jobs as they deem necessary. |
| Number of jobs you have | You probably juggle a lot of clients simultaneously. | You usually have one job at a time, or a small number of separate part time jobs. |
| Your role | You are an independent service provider. | You have a role within an organisation. |
| Is it your business? | You run your business from home. | You do not run the business and applied for a job there. |
| Who does the work involved? | You probably don’t do all of the work yourself and are responsible for paying others after you negotiate a price for the job. | You do your work yourself. |
Self-employed status
You are likely to be classed as self-employed if you run a business and its success or failure rests on your shoulders. You have the freedom to do the work where, when and how you want to as long as you fulfil the requirements of the contract. Self-employed people usually have more than one client or customer at the same time. They also often have other people that they send to do the work they have agreed to. If you are self-employed you will be the provider of all necessary tools and equipment, from stationary to scaffolding.
Employed status
You are employed if you work for a business and you’re not a partner or the owner. This work could be full time, part time or flexi time with a permanent or short contract. You are paid for a pre-set number of hours and your weekly or monthly pay has already had tax and NIC deducted. If you are an employee then your employer may provide you with cover for sickness, dependency, maternity/paternity leave and holidays. These elements are part of your terms of employment and there are some statutory rules that employers must follow.
Employees of employment agencies are considered employed because the agency usually deducts income tax and NICs from your wage. This type of employment involves short term jobs for different successive clients which the agency arranges.
You have established your own company
Once you have set up a company, it has its own legal identity and exists separately from you – even if you are the founder and sole employee. If it is your company then you are either classed as an employee or director of the company. The way you make tax and NIC payments will depend on how you define your role because that is how you get money from the company. Are you salaried or do you get paid dividends?
There are two different types of businesses and the tax rules are different for each one. Your company either sells services like tutoring, make-up artistry or IT; or it sells goods like clothing, food and knick-knacks.
Umbrella Companies
An umbrella company is an employment business that serves as a permanent employer to different agencies. The umbrella company will pay a contractor under PAYE after invoicing the recruitment agency.
If you are working for an umbrella company you will know that they usually pay a basic salary, which should always be at least the legal minimum wage. They also usually reimburse travel costs, because they are not subject to NIC and tax everybody saves a bit of money. The company is responsible for calculating your correct tax and NIC amounts, but you should keep tabs on them because you could be liable if they are incorrect.
Both employed and self-employed
It is possible, and increasingly common, for people to be both employed and self-employed at the same time. For example; if you are employed as a teaching assistant in a school during the day and have your own clients as a hair colourist in the evenings and week-ends.
Training status
There are three different types of training circumstance;
- ‘Contract of service’ – which means you are employed and are liable for NIC and tax payments.
- ‘Contract of training’ – Which means that you do not have to pay any tax or NICs on any sponsorship or expenses you are given.
- 1 and 2 at the same time – this is usually called being an apprentice. You train and work simultaneously and pay tax and NIC in the usual way. This may change if you are on a course which is sponsored by your employer. This situation is found within a range of careers, from solicitors to electricians.=
Government schemes
Government schemes are usually clear about whether you are a trainee or an employee. If you are a trainee then your contract will be with the scheme organiser and as an employee your contract will be directly with the person receiving your services.
The main element to consider is; are you observing how a job is done while helping out with minor tasks or are you also providing a service to the employer that is training you?
Again, the law is not prescriptive about a ‘contract of training’. A court case did decide some key points which help define trainee status;
- Trainees receive general training and can observe how a job is carried out.
- Trainees provide only minor help in the workplace.
- Trainees are not working for the employer with a ‘contract of service’ in place.
- Trainees are not classed as apprentices because they are not learning a trade.
There is record of a woman who was sponsored by the Home Office to do a Social Work university course, with the intention of continuing on to train as a probation officer. Her contract specified that the aim was to participate in education and training and she had no responsibilities as an employee. Therefore the sponsorship money she received was deemed non-taxable.
There is a useful ‘Contract of training and Apprenticeship’ flowchart on HMRC’s website if you are still confused about your training status.
Volunteering
If you give your time for free then there is no NIC or tax owed. Some organisations will reimburse any travel costs because they benefit from your time. There can be implications if you volunteer while claiming state benefits or if you are paid an expenses allowance instead of being reimbursed for specific costs. It’s best to check if you are unsure – go to GOV.UK website in the first instance.
‘One Off’ Jobs
Any payments you receive for one off jobs are classed as ‘casual earnings’ and should be reported in the ‘any other income’ section of your tax return. For example, if you make alterations to a friend’s suit and they pay you for your work, your profit is considered ‘casual earnings’.
Employment Status and the Courts
An important legal case recently established an important principle regarding the scope of employment tribunals; they are allowed to take into account employees’ actual working reality, whether it corresponds to any written and signed contracts or not.
This means that companies cannot hide behind self-employment contracts, that employees have no choice but to sign, when they should in fact be paid as employees of the business. In this case, a large car services company had a number of employees who had all signed contracts stating that they were ‘self-employed subcontractors’.
As the tribunal did not merely stop at the end of the paperwork, but looked at the employees’ working conditions, they found many factors which supported their ruling that these people were employees. This bodes well for any future employees with unscrupulous employers that classify their employment status wrongly and with intent.
