This section of the website is intended to help you work out what makes someone employed and what makes someone self employed for working out your tax and National Insurance.
If you are just starting out in work or business you may find it useful to get an idea of whether you will be employed or self employed.
Depending on whether you are employed or self employed will make a difference to the amount of tax and National Insurance contributions (NIC) you pay. It is very important to find out which of these applies to you.
We take a look here at the following common problems:
Is there a law that says whether I will be employed or self employed?
When am I likely to be self employed?
When am I likely to be employed?
I have set up my own company, what is my position?
I am working through a composite or umbrella company, what is my position?
Can I be employed and self -employed at the same time?
Can I be neither employed nor self employed?
Are there any jobs I might do when I will always be treated as being employed?
I am still not clear whether I am employed or self-employed
An important tax case
More information
Table
There is no straightforward legal definition of what it means to be employed or self employed and so over the years the law courts have looked at it many times. The courts have identified some situations in which you will definitely be employed and others when you will definitely be self-employed, but there are others where, even after many years, the position is not so clear.
If you are employed or self employed under employment law the same rules normally apply for tax and National Insurance. There are a few exceptions, however, see Are there any jobs I might do when I will always be treated as being employed? below.
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You will be self-employed if:
- You agree to do work but can send someone else to do the job for you - for instance, a builder who can send a mate, or a gardener who can send someone else to dig a garden.
- You can do the work where and when you like. For instance, a writer who agrees to write a book and can write whenever s/he wants to, as long as s/he meets the deadline set by the contract, will be self-employed.
- You can make a loss on the work - such as an electrician who guesses it will take a week to do a job, and agrees to do it for £600. If it takes him 10 days he will make a loss. Another example would be a joiner who has to redo unsatisfactory work, and cannot charge the client for the time spent redoing the work.
- You provide major items of equipment which are essential for your work - such as a pick-up truck, or scaffolding. Providing a normal car or van to take you to and from the place where you work does not fall into this category.
Sometimes it is clear that you meet these tests - for example, if you have a shop you can make a loss if you have to sell goods for less than they cost you.
If you do not meet these tests, it does not automatically mean that you are employed. You have to weigh a number of different factors together to get an overall picture - see the table below.
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- If you have an employment contract and work for a business which is not your own and in which you are not a partner, you will be employed.
- You will usually be employed if you work in a factory, shop or office and you receive a regular pay packet each week or month from which tax and NIC have been deducted.
- You can still be employed even if you only work part time or have flexible hours or if you are only on a short contract. But if you have a lot of short contracts which you organise and set up yourself, you are more likely to be self-employed.
- See also the table below.
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If you have set up a company which provides goods (such as food, clothing, cars etc) to customers, you will be a director and/or an employee of that company. Your tax and NICs will depend on whether you take your money out of the company as dividends or as salary. The position is complex and you should take advice from a tax adviser.
If your company is not supplying goods, but services - for instance you are a hairdresser, IT contractor, care worker, teacher or labourer - there are special and complex rules (known as IR35) which deal with the tax and National Insurance position. Your company may have to pay higher tax and NICs. You should take advice on this from a tax adviser or HMRC.
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Quite a lot of low income workers are employed by organisations called composite or umbrella companies. These are regarded with suspicion by HMRC. As a low income worker you are unlikely to realise that you are employed by one of those companies.
Normally you will be paid mostly in dividends (rather than wages) without any National Insurance and this may give you a clue. It is the company's responsibility to calculate the correct tax and National Insurance, and decide if other rules apply.
However, if the company gets it wrong and HMRC believe you knew you were not paying enough tax or NI, then they could ask you for the extra money. If you are worried about this you should ask the company what the tax and NIC position is, and you may also want to talk to HMRC.
If you are working through a composite or umbrella company you should still be paid at least the national minimum wage for the hours you work, and you should also check whether you are paying enough NI contributions to cover your future pension rights.
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You can be employed and self employed at the same time in different jobs, for example if you work for yourself as a hairdresser during the day but in the evenings you work as a receptionist in a hotel, you will be both self employed and employed.
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You can also be neither employed nor self employed if you just receive casual amounts for doing something every now and then. For example if on a one-off basis you made a wedding dress for a friend and she paid you for doing it - the profit on making the dress would be casual earnings and you would show this as 'any other income' on your tax return.
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There are special rules in the following situations:
- If your work is arranged through an agency you will be treated as employed for tax and NIC even though you may not be an employee of your client for employment rights purposes.
- If you are an actor, cleaner or a teacher you will normally have to pay the same National Insurance contributions as an employed person even if you do meet the normal tests for self-employment.
- If you are an examiner you are normally self-employed for NICs but employed for tax.
If there is no clear answer, you need to consider a lot of different factors and then paint a picture from the accumulation of detail as one judge put it.
The most important details you should consider are set out in the table below. You should consider all the questions and then look at the overall pattern which emerges. Does it suggest employment or self-employment?
Note that the law here is complex and these are simplifications. If you are still not clear, you should ask a tax adviser or HMRC for help.
In the table below, the person for whom you work is called your "engager" - he might be your boss or your client.
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An important legal case recently confirmed certain workers who had been classified as self-employed were in fact employees with a contract of employment.
The company involved was a large one offering car valeting and related services. The individuals concerned in the case all had written contracts, the terms of which were quite explicit in saying that they were being engaged as self-employed contractors rather than as employees. The worker was termed a ‘Sub-contractor’. Under the terms of that agreement, the worker confirmed that he was ‘a self-employed independent contractor’.
The agreement left nothing to chance in setting out the position of both the company and its workers. Nevertheless, the individual workers were able to claim that they were working under a contract of employment so that they could benefit from the National Minimum Wage and Working Time Regulations.
That claim succeeded in front of the employment tribunal and then in the courts.
So given the clear understanding between the parties, how did it all go so wrong for the company?
Essentially the view of the courts is that the workers had only one choice: sign up on the terms dictated by the company or seek work elsewhere. Indeed, the employment tribunal had specifically found as a fact that if the individuals had not signed the revised contracts produced by the company they would not have been offered further work from that date.
For this reason, the employment tribunal had been entitled to disregard the terms of the written documentation and to look, instead, at the real terms of the workers’ contracts. This was the case even though the individual workers went into their agreement with their eyes open as the company made no secret of the fact that it regarded the claimants as self-employed.
Once this principle was applied, all sorts of findings of fact by the employment tribunal justified its conclusion that these individuals were working under a contract of employment.
The following factors had been influential in that conclusion:
- the individuals in question could not be described as being in business on their own account;
- they had no control over the way they did their own work, being subject to the direction and control of other employees, and being obliged to clean the cars in accordance with a detailed specification;
- they could control the hours they worked only in the sense that they could leave when their share was done;
- they had no real economic interest in the way the work was organised, though they could earn more by doing more work;
- they had no say in the contractual terms, which were devised by the company;
- their invoices were prepared by the company, which also decided the amount of deductions to be made for insurance and materials, without any evidence of the correlation between those deductions and the actual costs;
- the company determined the rates of pay, increasing or reducing those rates unilaterally;
- the individual workers were fully integrated into the company’s business and, with insignificant exceptions, did no other similar work;
- that despite a substitution clause in the written agreement, the individuals were in fact required to do the work themselves; and despite another clause that implied that there was no obligation on the workers to turn up, or on the company to provide work, this was wholly inconsistent with what happened in practice.
It was also noted that the company provided, at the time under consideration, all the equipment and materials, including jet washers, vacuum cleaners, sponges and chemicals.
In summary, the Supreme Court agreed with the earlier Court of Appeal ruling, which in turn concluded that the employment tribunal was entitled to find that the individuals were working under contracts of employment.
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For more information about who is an employee and who is self-employed for tax and national insurance:-
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| Employed | Self-Employed |
| Method of payment | Paid a regular wage by the day, week or month | Invoice the client for work done |
| Who has control over how work is done? | The way you do your work is supervised | You are trusted to do the work yourself - as long as the final product is up to standard |
| Where do you do the work? | At the place required by your engager | At a place you decide |
| When do you do the work? | You are required to turn up at a certain time and work the agreed hours | You have freedom to decide when you do the work, in consultation with your engager |
| Benefits | You are given rewards other than by cash or cheque for your work, such as vouchers, free or cheap meals, a company car or shares | You are paid only by cash or cheque |
| The work you do | Your engager can move you from job to job as needed - for instance, you may have to cover for someone who is sick | You only do the particular job which you agreed to do |
| The number of jobs | You have one job at a time (or a small number of regular jobs, such as one in the morning and one in the evening) | You work for a lot of people and you juggle their requests (like a builder or a taxi driver) |
| Your role | You have a recognised role at the place where you work - for instance, people may report to you, or you may be listed in the phone book | You are an independent provider of services and not a permanent part of the engager's business |
| Your business? | You do not run a business from home; when you need another position you contact the Jobcentre or an employment agency | You have a business which you run from home - for instance, you advertise your services through yellow pages, you take appointments, you have your own business cards, you are VAT registered |
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