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.
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 ‘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.
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.
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 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 by the end client.
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. 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 being treated as self-employed for all other purposes. Self-employed people do not have the rights and protections that ‘workers’ have under self-employment law (remember agency workers are usually ‘workers’).
This saves the employment intermediaries concerned money, just in different ways, 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 acts as an ongoing employer to agency contractors. 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 pays the agency for your work. The agency takes its fee and then passes the balance on to the umbrella company and the umbrella company then pays you under PAYE.
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, 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.
These new rules mean that it is now 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) or even try and set up a Personal Service Company for you.
You should be extremely wary of businesses that try and get around the new rules on travel and subsistence. You may even decide to report them to HMRC so that their practices can be investigated.
You may be asked to set up a limited company to run your business through – sometimes this can save the engager (or the agency/umbrella company you work through), money because they do not have to operate PAYE when paying a limited company and will not have to pay employer’s NIC. 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 be completing personal tax returns to declare such 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).
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). 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.
As such, your employment status will need to be considered (there is a tool on GOV.UK to help you do this). If you would be an employee of the end client you are working for, but for the limited company, 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.
Because historically, IR35 has not been enforced consistently by HMRC, since April 2017, if a person is working through their own Ltd 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 (even if the Ltd 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.
You may be interested to know that the government have decided to extend the IR35 public sector reforms to the private sector from April 2020. But the changes should only affect workers in Ltd companies that supply their services to medium and large size businesses.
You can find a government brief outlining the proposed changes on GOV.UK.