⚠️ We are currently updating our 2020/21 tax guidance across the website
Am I employed, self-employed, both, or neither?
Whether you are employed, self-employed, both or neither will make a difference to the amount of tax and National Insurance contributions (NIC) you pay, as well as how you pay. You need to know which of these apply to you, so that you can comply with your tax obligations and claim tax reliefs available to you.
On this page, where you can find out more about employment status and discuss your position if you work through an intermediary:
There is no straightforward legal definition of what it means to be employed or self-employed – your employment status. There is information on the issues to consider if you are unsure whether you are employed or self-employed in the self-employment section. We also give more information on the following topics in that same section:
- when you are likely to be employed;
- when you are likely to be self-employed;
- what to do if you are still unsure of your employment status;
- whether you can be employed and self-employed at the same time;
- whether you can be neither employed nor self-employed;
- where you can find more information.
I am working through an agency, what is my position?
In a typical agency situation, the agency will supply you to an ‘end client’. You will usually perform tasks under the day-to-day supervision of someone at the end client location but will send time sheets to the work agency, who will pay you.
Technically, you are usually neither an employee of the end client nor of the agency, however under a special tax law rule, the agency is responsible for deducting income tax and National Insurance contributions (NIC) from the salary paid to you. They must also pay employer NIC. This is a cost to the agency, but it is usually covered in the fee that is charged to the end client by the agency.
In terms of employment law (which is a bit different from tax law) agency workers are usually ‘workers’ for employment law purposes (the category that falls somewhere between employee and self-employed) and as such are entitled to basic protections, such as being paid at least the national minimum wage (NMW) or national living wage and working time entitlements such as paid annual leave). You can find information on your rights as an agency worker on GOV.UK.
⚠️ Note: If you are taken on by an agency on or after 6 April 2020, you will be entitled to a written statement of employment particulars on or before your first day. In addition, from 6 April 2020, agencies will be required to provide new agency workers with a document known as a ‘key information document’ prior to signing them up.
Even though you may work on lots of different engagements and may incur substantial travel costs in getting to your various work locations, another special tax law rule says that agency workers are not normally entitled to tax relief on the travel and subsistence expenses they incur. This is one of the reasons for the growth in umbrella companies – more on these below.
You can find a useful outline of the main things to consider in our factsheet on agency workers.
If you have a problem with an agency, then you can complain to the Employment Agencies Standards Inspectorate (EAS). You should also check if the agency is a member of a membership body for recruitment agencies such as the Recruitment and Employment Confederation (REC) and the Association of Professional Staffing Companies (APSCo).
Can I be a ‘self-employed’ agency worker?
In recent years, some agencies have been trying to avoid having to operate Pay As You Earn (PAYE) for workers – this means that their costs are reduced.
They do this by saying (or by using arrangements that say) that the worker is ’self-employed’, so that the worker has to pay their tax and NIC to HMRC themselves and there is no employer's NIC to pay.
However, treating a worker as ‘self-employed’ when they should actually be treated as an ‘employee’ leaves the worker in a vulnerable position and means that the government is losing money. Since 6 April 2014, the government has tightened up the rules to prevent ‘employment intermediaries’ (agencies and other businesses involved in the supply chain), from being able to do this so easily. The rules essentially say that the only time an employment intermediary can escape operating PAYE is where the worker is under NO supervision, direction or control.
⚠️ Note: his test applies to people working in the construction industry even though they often have their taxes deducted at source anyway (under CIS). Only if a worker is not under supervision, direction or control can an agency operate CIS.
You can find HMRC’s guidance on supervision, direction or control on GOV.UK. It is unlikely that you would be under no supervision, direction or control. Agencies are expected to report any payments made where they do not operate PAYE to HMRC. They also need to provide details of the workers and why PAYE was not used.
It may be tempting to turn a blind eye if PAYE is not being operated on your wages, as this may mean lower costs for you. However, unless you are genuinely self-employed, it is best to tell the business paying you, that you want to be dealt with under PAYE, so as to protect yourself from any problems with HMRC later down the line. If they will not do this, you may decide to report them to HMRC so that their practices can be investigated.
You should be aware that recently, a variation of this arrangement is being used in the temporary worker industry. This ‘hybrid’ variation sees you being treated as an employee for tax purposes (so that PAYE is operated as is required under law) but you are being treated as self-employed for all other purposes.
This 'elective deductions model' or EDM, exploits the fact that employment law and tax law are different. In employment law you have three categories of person - employee, self-employed or 'worker'. In tax law you only have employed and self-employed. Usually people have the same status for both employment law and tax law, however this is not always the case.
Self-employed people do not have the rights and protections that ‘workers’ have under employment law (remember agency workers are usually ‘workers’). Putting workers in these 'EDM' arrangements saves the employment intermediaries concerned money, however, is unlikely to benefit you in any way at all. As such, you should think very carefully about accepting such terms and conditions.
I am working through an umbrella company, what is my position?
Sometimes an agency will offer you the chance to work through an umbrella company. An umbrella company is an employment business that takes on agency workers as its own employees. Thus, if you are working through an umbrella company, you are normally treated as an employee of the umbrella company.
In this situation, the end client that you work for will pay your Ltd company for its services (or will pay the agency/umbrella company who will then pay your Ltd company), usually on production of an invoice (they should not pay you in your personal capacity). The Ltd company will have to run a payroll to process your salary correctly under PAYE and you should probably be completing personal tax returns to declare any dividend income and pay any income taxes.
Having a ‘core’ employment with an umbrella company means that the various end user client sites turn into ‘temporary workplaces’ under special tax rules and means the expenses of travel to those workplaces from home (amongst others) might, in limited circumstances, be allowable for tax. This saves you and the umbrella company money.
You can read more about umbrella companies in our factsheet on working through an umbrella company, which we have created in partnership with PRISM, a not for profit umbrella company representative body.
The factsheet covers a range of issues on which workers are likely to have questions including holiday entitlement and other employment right issues, the availability (or otherwise) of travel expense relief and why they may have been handed over to an umbrella company by an agency in the first place. It includes a helpful diagram explaining how umbrella companies work, a sample payslip to help demystify the sometimes confusing payslip entries and links to more help.
Very importantly – on the basis that workers passed to an umbrella company should be offered an 'umbrella rate', which should always be higher – it includes a ‘ready reckoner’ to help workers understand whether the rewards they are being offered through an umbrella company are roughly equivalent to what they might have otherwise received, once the various deductions the umbrella company has to make have been considered.
Travel and subsistence
Since April 2016, the rules around relief for travel from your home to your temporary workplaces if you work through an umbrella company have been really tightened up. You can read more about some problems with umbrella companies that led up to the April 2016 change in the Low Incomes Tax Reform Group's report.
The April 2016 rules say that relief for home to work travel and subsistence expenses is restricted where a worker:
- personally provides services to another person
- is employed through an employment intermediary (such as an agency or umbrella company)
- is under the supervision, direction or control of any person.
You should note that even where travel and subsistence expenses could still be allowed for tax purposes, for example because of multi-site visits, a different rules mean that an umbrella company should probably not be reimbursing your expenses (apart from possibly, mileage expenses) on a tax and National Insurance free basis as part of your normal pay.
But all of this makes it more expensive for the umbrella company to employ you as they cannot claim employer’s NIC relief on your travel expenses.
To get round the new rules, some unscrupulous businesses may try and say that you are not under the supervision, direction or control of any person (which would be highly unlikely unless you are genuinely self-employed) so they can continue making use of the special mileage expense rules; or even try and pay you in 'loans' or use other non-compliant arrangements such as those we describe below.
There are a huge number of umbrella companies out there and so the marketplace is very competitive. In order to win customers and generate profits, they often come up with new models to try to get round the rules introduced by government.
In particular, at the moment (and in addition to the poor practices around ‘travel and subsistence’ we are aware of as described above) we understand that the following non-compliant umbrella company models are currently in operation for low paid workers:
Elective deductions model: as explained above. This is a very harsh model which does not benefit workers at all. The problem, however, is that there is not an overarching body looking after employment law (HMRC only look after tax law). This makes the question of who people should complain to if they disagree with their employment law status unclear. (If you are affected, as a first step, you could try talking to ACAS or the Pay and Rights helpline.)
Wage theft: because of problems inherent in very short-term agency work when it comes to calculating holiday leave and pay, workers used to get extra pay on top of their hourly rate instead of being given paid holiday. However, this ‘rolled up’ system has now been deemed unlawful. If a worker is not on a rolled up system and leaves an umbrella company having taken fewer holidays than they are entitled to, they should be paid in lieu of the untaken holiday – but it is our understanding that this does not always happen.
Mini-umbrella companies: this model sees the formation of lots of individual companies, often with foreign nationals as directors. On the face of it, all is well as the worker will be having PAYE operated. However, in the background, workers are being put into mini companies, where the Employment Allowance is being claimed inappropriately. Despite an HMRC spotlight, and media/press attention, we have recently heard of someone seemingly in mini umbrellas – the key giveaway is that each of their payslips had a different PAYE reference.
Payroll-fraud: it would appear that some umbrella companies are calculating and taking deductions from people’s pay based on one set of (proper) pay figures but are then understating these pay figures in their submissions to HMRC thereby reducing the tax/National Insurance amounts that are calculated and that they pay over. If you work through an umbrella company, it is a good idea to check your Personal Tax Account regularly to make sure that the pay and tax details being submitted to HMRC by the umbrella company match your payslips.
Non taxable payments: some highly aggressive umbrella companies set up arrangements where, instead of receiving normal taxable pay, workers receive payment in the form of form of artificial 'non-taxable' investment payments, grants, loans, credits and so on. This is very likely to be tax avoidance and is extremely high risk – you could end up paying far more than just the tax back to HMRC, as we explain in our news article Agency workers: being promised the world by an umbrella company? Don't fall for it!
You therefore need to be extra vigilant about being offered payment in the form of loans, grants, advances etc. (even if it has a ‘QC’s opinion’ or appears to have been ‘approved’ by HMRC – which really means very little in this context). HMRC probably will not go after the umbrella company for unpaid tax (they may not be able to as the umbrella company could be based offshore or could simply fold); they will go after you.
(IIf you have been in loan arrangements in the past and are now affected by the ‘loan charge’, we have published a series of articles looking at the situation in some detail, what it is, what is happening and where to get help. There have also recently been some changes announced to the loan charge which we explain in a further article Loan charge changes: what they mean... and what they don't.)
Not all umbrella companies act non-compliantly, but you should ensure you check any arrangements carefully. If you have concerns about a certain umbrella company, you should ask if you could use a different one. You should be aware that some agencies are incentivised by a commission into encouraging you to join up to certain umbrella companies, so they may push back. If this happens, you need to think very carefully about how to proceed. You may decide to report them to HMRC so that their practices can be investigated.
If you are in an umbrella arrangement that you do not understand or that seems different to what we have covered here, please let us know, as this will be very useful to feed into our work.
I work through a limited company: what is my position?
If you supply your services via your own limited company, you may do this, or have been asked to do this (by an agency or umbrella company for example), for many different reasons. But one of the main ones is that it can result in significant tax and National Insurance savings, as compared to being taxed like an ordinary employee, for both you and others in the supply chain that you supply your services in.
The cost savings arise for you because basically, you can receive income from the company as dividends, which are taxed more beneficially then salary. Cost savings arise for others in the supply chain, mainly because there is no employer’s National Insurance when paying a company. You may also pay an ongoing fee for ‘accountancy’ services to help you run the limited company, to an entity in the supply chain, which is an additional revenue stream for them.
However, setting up a limited (Ltd) company is very different from working through an agency or umbrella or just being an employee or self-employed.
A business which is run as a Ltd company will be owned and operated by the company itself. The company is recognised in law as having an existence which is separate from the person who formed the company and from the directors/shareholders. A company is liable to corporation tax on all 'profits'. A company must file accounts in a specific format to Companies House and file corporation tax returns to HMRC.
In your personal capacity, you will be a director/shareholder of the Ltd company and also the person that the company hires out to provide services (you would usually set yourself up as an employee of the company to do this). As such, you may be receiving income from the company in the form of a salary and/or dividends (which are taxed at more beneficial rates than salary).
In this situation, the end client that you work for will pay your Ltd company for its services (or will pay the agency/umbrella company who will then pay your Ltd company), usually on production of an invoice (they should not pay you in your personal capacity). The Ltd company will have to run a payroll to process your salary correctly under PAYE and you should probably be completing personal tax returns to declare dividend income and pay any income taxes.
There is information on running a limited company on GOV.UK, however, this generally may not be a suitable way to operate for the low-paid because of all the administrative considerations, which can be very complicated to understand and/or expensive (if you pay someone to help you with them).
IR35 / off payroll working rules
If your company is not supplying goods, but services – your own services, for instance you are a hairdresser, IT contractor, care worker, teacher or labourer then things get even more complicated. This is because your company will be a ‘Personal Services Company' and you will have to consider the impact of the intermediaries legislation (commonly known as IR35 / the off payroll working rules). These rules ensure that individuals who effectively work as employees are taxed as employees, even if they choose to structure their work through a Ltd company.
Under IR35, if you would be an employee of the end client you are working for, but for the Ltd company (there is a tool on GOV.UK to help you decide this), then the Ltd company is supposed to tell HMRC and potentially pay them some extra tax. This will usually apply where money has been taken out of the company in the form of dividends - to make up for the fact that they are taxed more beneficially than salary. You can find an overview of the IR35 rules on GOV.UK.
Please note, these rules are particularly complicated and professional advice would be needed if this applies.
Because historically, IR35 has not been complied with or enforced consistently by HMRC, since April 2017, if a person is working through their own Ltd company in the public sector, then they are no longer in charge of determining if IR35 applies. The IR35 determination now falls to the public body and if it applies, PAYE tax and NIC are withheld at source on any payments to the Ltd company (even if the Ltd company is paid by an agency or umbrella company rather than the public body).
You can find more information about working through an intermediary in the public sector on GOV.UK.
The public sector reforms will be extended to the private sector from April 2021 (delayed from April 2020) but they should only affect workers in Ltd companies that supply their services to medium and large size businesses (that is, those that meet two or more of the following conditions: annual turnover of more than £10.2 million, a balance sheet total of more than £5.1 million, more than 50 employees).
Those providing their services to ‘small’ clients in the private sector (as well as individuals, for example, homeowners needing an electrician or gardener) will still need to consider whether the old IR35 rules apply to them – these do not just fall away altogether post April 2021. In fact it is foreseeable that the old rules may start being better enforced after April 2021 – so you need to make sure you are clear on whether your client is ‘small’ and if so, what the IR35 rules mean for you.
More detail on off payroll working in the private sector
Basically, the new rules in the private sector say that if you look like an employee for the medium or large end client that you work for in the private sector, then you should pay tax like an employee. However, because it is only a ‘deemed’ employment relationship, you will not get any of the employment rights that usually go along with being an employee.
This means that PAYE tax and National Insurance will have to be operated on the amount paid to the company for your services, by whichever entity is responsible for paying your limited company. You should then be able to draw out the money from the company as either a salary or dividends without further deductions. You can read more about the requirements on GOV.UK.
The end client that you work for is responsible for deciding whether you look like an employee (as opposed to a genuinely self-employed person), by applying the general ‘status’ tests. If you are a lower-paid worker, you are not likely to have much autonomy over the work that you do for them, so you will probably be determined to look like an employee.
This is really the key difference between the new rules and the old rules. Under the old IR35 rules, the decision as to whether you look like an employee or not rests with your own limited company, whereas under the new rules, the end client makes the decision instead (with ramifications if they get things wrong). This makes it much more likely that the rules will be applied properly and that everyone will then pay the correct amount of tax and National Insurance in accordance with the law.
To address concerns about the new rules from affected businesses and individuals, the Government has identified a number of changes to address concerns and support the smooth and successful implementation of the reform which you can read about on GOV.UK.
Things to note if you stop using a limited company after April 2021
If you fall under the new rules, post April 2021 the cost savings you may have received until now will disappear, so working through a limited company therefore becomes much less attractive, especially when you consider all the admin and hassle that usually goes with running a limited company. (Indeed, there will be so much potential cost and complexity in supply chains involving limited companies, that if you are a lower paid worker being asked to work through one post April 2021 – you probably need to ask yourself why....)
Therefore, you may wish to, or be asked to, stop working through your own company. Your options are then to try and get taken on directly by the end client as an employee, or carry on working ‘flexibly’, via agencies for example, but under PAYE. This will usually mean that you will need to work through an umbrella company, as agencies do not usually operate PAYE on workers’ wages themselves.
If you are asked to work through an umbrella company, you should bear in mind that the only umbrella arrangements that should be around for the lower paid these days, are those that are effectively just an outsourced PAYE bureau. Be very wary of the potential problems with umbrella companies we outline above.
If you stop working through your own limited company, you also need to take steps to ensure that your old limited company will be closed down properly.
If you are paying for accountancy services, arranged perhaps by an entity in the supply chain, you should be aware that they may not be prepared to deal with the winding up of the limited company as part of their normal fee. You should also consider whether there will be costs involved in terminating the accountancy services (particularly if you have signed up to pay for a ‘package’ of services on an ongoing basis).
These ‘extra’ costs may be unwelcome but the bottom line is that if you do not make sure that the limited company is closed down properly, you could be left with messy limited company and corporation tax compliance issues that could follow you around for many years.
Independent, professional advice may ultimately be needed.
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