Am I employed, self-employed, both, or neither?
Self-Employed vs Employed
There are many reasons why someone might choose to be self-employed rather than working for another person. Some people prefer to control their own destiny, others like having flexibility around their working hours, some enjoy the freedom of choosing what projects to pursue and others simply love the challenge of creating something unique. Whatever the reason, it’s important to understand the difference between self-employment and employment.
What Is Employment?
The term ’employment’ refers to a relationship between an employer and employee. An employer is responsible for providing the necessary equipment, facilities and resources required to enable an employee to carry out his or her job effectively. Employees generally provide their labour under the terms of a written agreement called a contract of employment. This contract sets out the conditions of employment including the remuneration and entitlements of employees.
What Is Self-Employment?
In contrast to employment, self-employment involves a contractual arrangement between an individual and himself or herself. As such, there is no employer involved. Instead, the individual is considered to be the employer. Self-employment is often referred to as freelancing because it involves individuals offering their skills and expertise to clients on a freelance basis.
Why is it crucial to know if I work for myself or for someone else?
Income Tax and National Insurance Contributions (NICs) are payable on earnings. In general, employers are responsible for paying NICs on behalf of employees. However, there are exceptions to this rule. For example, if you are self-employed and earn less than £10,600 per annum, you do not have to make any payments. If you are self-employed earning over £10,600 per year, you must register for PAYE and make class 1 national insurance contributions on your earnings.
If you are employed and earn less than £8,100 per annum, you must make class 4 NICs on your earnings. If you are employed and earn over £8,100 per year, you must make class 2 NICs on your earnings plus a further amount based on how much you earn above £8,100 per yr.
Is it against the law for me to be either employed, self-employed, both, or neither?
The term “employment status” is used to describe how people are treated under the law. Some people are employees while others are self-employed. This article looks at what employment is, what it isn’t, and what distinguishes the two types of workers.
Employment generally refers to working for someone else. You might call yourself an employee, even though you run your own business, because you don’t have the risks associated with being your own boss. For example, if you’re a contractor doing construction work, you’ll probably be classified as an independent contractor, rather than an employee.
Self-employment, meanwhile, involves setting up a small business and taking care of everything yourself. If you’re a sole trader, you set up a limited company, sell shares in it, and take on customers directly. If you’re a partnership, you form a limited liability partnership, buy property or equipment, hire staff, and deal with clients. A freelancer works independently, without having to rely on anyone else.
There is no straightforward legal definition for the word ’employment’. Instead, the courts look at certain factors to decide whether someone is employed or self-employed:
• Whether you have a contract
• What duties you perform
• Who controls what happens
When am I likely to be employed?
You are probably wondering how long it takes to find a full-time job. If you want to know what it really takes to land a well-paying position, read our guide to finding a job fast.
When am I likely to be self-employed?
Self employment is often viewed as a risky venture. Many people think it requires a lot of money, time and effort, and there are many ways to be a self employed person. Some people see themselves as entrepreneurs while others like working for someone else. What do you think about being self employed?
You might want to check out our infographic on how to become self employed.
I’m still unsure whether I’m employed or self-employed.
There are two main ways of work: either you are an employer or you are self-employed. If you are self-employed, you set your own hours and choose how many hours you want to work each week. You decide what you charge for your services and how much you earn. However, if you are an employee, you usually don’t choose how long you work or how many hours you work each week. Your boss decides those things. You receive payment every month and tax is deducted automatically.
If you are self-employed you are responsible for paying income tax yourself. You can claim expenses such as rent, mortgage interest, car costs, insurance and repairs. But you cannot claim expenses like meals out, clothes, travel and entertainment unless you meet certain criteria.
The key question here is whether the person who pays you is really controlling what you do. For example, if you are a freelancer, you might think you are self-employed because you set your own hours. In reality, however, you are likely to be an employee. This happens most often with independent contractors. They often think they are self-employed because they set their own hours. But in fact, they are probably employees.
You can find out whether you are an employee or self-employed by asking questions about the following:
• How much control does the employer have over what you do?
• Is it possible for you to change jobs without permission?
• Does the employer provide training?
What help do HMRC provide?
HM Revenue & Customs (HMRC) has produced a factsheet to explain things like employment and self-employment for tax. This includes definitions of both terms, along with examples of each. There is an online tool called “Check Employment Status for Tax” (CEST). This gives you information about your current employment status, including whether you are employed, self-employed, or retired.
The CEST tool is designed specifically for tax purposes. If you want to know your employment status for other reasons, such as benefits or pension entitlements, make sure you check with the relevant organisation.
Make sure you understand how the tool works before using it. For example, there is no way to see how many hours you work per week, or how much you earn. So don’t rely on the figures given by the tool alone.
I work in the gig economy, what is my position?
People earning through the gig economy – such as freelancers, contractors, independent workers and those working on a project basis – should check whether they are eligible to claim income tax or NICs.
Gigs are generally considered to be self-employed, rather than being employees. This means that there are different rules for people paying through apps like Uber or Deliveroo, compared to traditional employers.
There are two main forms of taxation in the UK – self-employed or employed. Depending on how much money you make, you could be classed as one or the other.
Income tax is charged at 20% for everyone except those earning less than £12,420 per annum, who pay 10%. For those earning £12,421 or more, the threshold rises to £13,440.
National Insurance contributions (NICs) are levied on every person regardless of earnings, although some people may choose to opt out. Those who do pay NI include anyone earning £5,940 or more, and those who are aged 25 or under.
Those who are self-employed are required to submit quarterly returns to HMRC. They are expected to report their taxable profits and losses, and pay any taxes due.
The amount of tax paid depends on the level of profit earned. If you are making less than £10,000 a year, you won’t owe any tax. However, if you’re earning £10,001 to £20,000, you’ll pay 15%, while those earning £20,001 to £50,000 will pay 30% and those earning over £50,000 will be charged 40%.
I work in the construction industry, what is my position?
A person working in the construction sector is not necessarily self-employed. You might think it’s obvious, but there are some misconceptions about how employment works. Here we look at the difference between employees and contractors, and find out why you might want to consider becoming self-employed.
If someone offers you money to do a job, they are offering you employment. This is because you are expected to work for a set amount of hours per week, usually 40 hours. These hours are known as the employee’s contracted hours.
The employer pays the employee a salary for those hours worked. For example, if you are working 40 hours per week, you will receive £200 each week. However, you don’t actually earn that money unless you complete the agreed number of hours. In most cases, employers pay wages weekly, although some companies offer fortnightly payments.
You are responsible for paying taxes on your earnings. As well as income tax, national insurance contributions (NICs), and VAT, you must also pay corporation tax.
If someone offers you cash to carry out a task, they are offering you a contract. This is because you agree to perform certain tasks within a defined period of time. The contractor agrees to provide the materials needed to carry out the work, and the employer agrees to pay the contractor a fixed fee for completing the project.
What is my role as a partner in a partnership?
A partnership is not a separate legal entity like a limited company or LLP. It does not have shareholders, directors or employees. Instead it is a group of people who agree to work together to achieve a common goal.
Partnerships come in three main forms: general partnerships, limited partnerships, and unincorporated associations.
The most basic form of partnership is a general partnership. This type of partnership operates under the same rules as companies – there is one person called the managing director and he/she manages the whole thing. However, unlike a company where profits go to shareholders, partners in a general partnership split the profit equally.
Limited partnerships are similar to general partnerships except that they are limited in terms of the number of partners. In addition, the partners cannot make decisions without unanimous agreement.
Unincorporated associations are groups of individuals who decide to set up a joint venture. They do not need to register with Companies House, although some choose to.
What is my role now that I’ve started my own business?
A partnership is not a separate legal entity from its partners. If you want to know how it works, read our guide to partnerships here. But there are some things you need to know about setting one up.
First off, you don’t actually form a partnership – you join a partnership. This is because a partnership is a way of doing business together. You’ll need to register with Companies House and fill out a Partnership Agreement. Once registered, you’ll become a partner.
You can choose whether to be a member of the partnership or not. If you’re not a member, you won’t receive any profits and losses, nor will you be able to vote on decisions affecting the partnership. However, if you do decide to be a member, you’ll still be liable for the debts and liabilities of the partnership.
The biggest difference between a company and a partnership is that a company is a separate legal entity from the people involved in running it. In a partnership, everyone shares liability for everything done in the name of the partnership. So, if someone goes bankrupt, all the partners are equally responsible for paying off the debt.
If you go into a partnership without having the necessary skills, expertise or experience, you could end up losing money. When you start a partnership, make sure you understand the risks involved.
Can I work and be self-employed at the same time?
You can be employed and self-employeed at the same time. However, it depends on what you do. For example, if you work part-time for yourself, you could still be considered self-employed. In this case, you must pay income tax on your earnings.
If you are self-employed, you should consider claiming expenses relating to your job via the self assessment system, rather than on your employer’s PAYE returns. This way, you can keep track of how much money you earn and spend.
Is it possible for me to be neither employed nor self-employed?
There are different types of employment. Some people choose to work full-time while others prefer part-time jobs or freelance work. If you want to make sure you don’t fall into one category or another, it might help to understand the differences between each.
A contract of service exists where someone provides a service to you. This could be anything from cleaning your home to running errands for you. You pay them for the service they provide.
An apprenticeship is a way of learning a trade. For example, you could become a plumber or electrician by completing an apprenticeship. Apprenticeships are often paid for by employers. They generally involve a combination of study and work under supervision.
If you’re looking to learn something new, volunteering is a great option. You’ll gain skills and knowledge, whilst helping charities and communities. However, you won’t earn any income.
You can also consider becoming a freelancer. Freelancing involves carrying out specific tasks for clients. You set your rates and decide whether you want to offer fixed price contracts or hourly rates.
Tax and National Insurance (NI) rules apply differently depending on what type of worker you are. Find out more about tax and NI here.
Is it true that if I am self-employed for tax purposes, I am also self-employed for all other purposes?
There is a difference between being self-employed for tax and working for employment law purposes. Self-employment for tax means that you pay yourself a salary rather than having a job where you work for someone else. You are still considered employed under employment law because it is assumed that you are paid to do something. However, there are some differences between the two. For example, if you are self-employed for tax but employed for employment law, you won’t receive the same benefits such as sick pay, maternity/paternity pay or holiday pay.
Tax credits and Universal Credit are both government schemes designed to help people into work. They are two separate systems which run separately from one another. Tax credits are income support payments which individuals can claim against their earnings. Universal Credit is a benefit payment which replaces six different benefits including Income Support, Housing Benefit, Child Tax Credits, Jobseekers Allowance, Employment & Support allowance and Pension credit.
Both tax and employment law are changing rapidly and therefore, the laws in this area are likely to change in the near future.
Being self-employed for tax means that the rules around how much money you earn and how much tax you owe are different to those applying to employees. Therefore, you might not qualify for certain benefits like working tax credit.
The rules around what qualifies as self-employment vary depending on whether you are claiming for tax or employment law purposes. If you are self-employed, you must meet the following criteria:
• Your main activity is running your own business
• You carry on your trade or profession without regular employees
Frequently Asked Questions
What are the benefits of being self-employed?
Self-employment is becoming increasingly popular among people looking to make extra cash, particularly those who want to avoid the 9am-5pm office routine. But what exactly does self-employment mean? And how do you go about setting up your own business? Here we look at the pros and cons of being a freelance consultant.
What are the disadvantages of being self-employed?
Being self-employed isn’t always easy. But it’s certainly worth considering if you’re thinking about starting up your own business. Here are some of the things you might want to think about.
1. Start-Up Costs
The biggest cost of running a business is often the initial outlay. This includes buying equipment like computers and printers, paying rent, hiring employees, and paying yourself a salary. If you don’t already have the money saved up, there’s no way around this one.
2. Admin & Bookkeeping
Administration and bookkeeping are another big cost. Many small businesses forget to factor these in when setting up their budgets. They usually end up spending far more than they budgeted for. Make sure you set aside enough cash each month to cover your admin and bookkeeping costs.
If you’re just starting out, you won’t know what you’re doing. So you could spend lots of time and effort on something that doesn’t work out. Or you could make mistakes that hurt you financially. It’s better to do less planning and research and focus on growing your business rather than worrying about how much it costs.