If you are finding work what is the difference between being employed or self employed?

You apply for a job and the engager tells you that you are going to be self employed.

  • What does this mean?
  • What is the difference between being self employed and being an employee?
  • What rate of pay should I accept as a self employed person?

A week by week guide to starting work


Self employed v employed: key differences

  • If you are self employed, you work for yourself, you do not have any employment rights and you pay your own tax.
  • If you are an employee, you work for the employer, you have employment rights and your employer accounts for PAYE and National Insurance to HMRC and deducts these from your income before it pays you.

There are many more differences:

 Details

Self employed

Employed

You work for:

Yourself: you provide your services at an agreed rate to an engager

An employer: under the terms of an employment contract

Who determines your employment status when you work for an engager?

The engager

The engager (your employer)

How are you paid

You invoice your engager your fee.

Your engager pays your gross fee.

Your employer pays you via its payroll.

Your pay is net of deductions for PAYE, NICs and pensions (if applicable)

How do you pay tax & NICs

You must register with HMRC

You work out your profit (income less expenses)

You file a self assessment tax return

You pay income tax and NICs directly to HMRC under self assessment based on your profits.

It is deducted from your gross pay by your employer who pays it to HMRC.

Who gets fined if tax and NICs is returned or paid late to HMRC?

You do

The employer

Are you entitled to the National Minimum Wage?

No

Yes

What are the minimum hours that you can work

0

0 hours, although holiday pay will still accrue

What are the maximum hours you can legally work?

Unlimited (there are only 168 hours in a week!)

48 hours, under the Working Time directive, subject to exceptions and opting out.

40 hours for anyone who is 16-18 years old

Am I entitled to a paid break if I work long hours?

20 minutes for every 6 hours is reasonable

20 minutes for every 6 hours

Are you entitled to paid holiday

No

Yes: up to 28 days per year (5.6 weeks)

Public holidays may be counted in the 5.6 weeks, or added as extra days

Are you entitled to statutory sick pay or statutory maternity/paternity pay

No

Yes

Are you automatically enrolled into your employers’ pension scheme and benefit from an employer funded pension scheme

No

Yes

What happens if you no longer wish to work for your engager?

You notify them, you may have agreed in your contract for a notice period by either party.

You notify them, you may have agreed in your employment contract for a notice period by either party.

Can you be automatically dismissed without notice?

You can put terms into a written contract with your engager that deals with dismissal. Normally the engager will want a flexible arrangement.

You have employment rights which protect you from unfair or wrongful dismissal

Can you claim tax relief on expenses incurred in doing your work

Yes

Yes, the rules are more restrictive for employees though.

Can you charge your engager expenses

Yes, if your contract provides for charging.

You may reclaim expenses as agreed by your employer’s expenses policy.

Can the engager provide assets or any benefits?

It is unlikely however engager may often allow self employed contractors to operate machinery or drive their vehicles.

This is down to the employer’s policy and what you agreed when you took the job.

 

Employment status

  • You can check your employment status using HMRC's check employment status tool.

Payment for your services

  • Most self employment people invoice on a weekly or monthly basis. Some platforms will invoice automatically for you.

Paying tax

Self employed people have to calculate their profits for tax purposes.

You profit is calculated as:

a) Your income from self employment less: your allowable expenses, or

b) if your allowable expenses are less than £1,000 per year, your income from self employment less £1,000.

You then pay:

£3 per week in Class 2 National Insurance when their self employed profit exceeds £6,365 per year, plus

12% Class 4 National insurance on their profits inexcess of £8,432 per year, plus

20% income tax on profits after deducting your personal allowance of £12,500 per year.

Pension contributions

  • Employees are automatically enrolled into pensions.
  • A self employed person will need to contribute 8% of profits to a personal pension scheme in order to ensure their pension is funded in a similar way. Most employees will be contribuing 5% of their income and their employers will be contributing a further 3%.

Holiday pay

  • The self employed do not qualify for holiday pay.
  • For employees holiday pay is calculated in different ways depending on the employer and this can make it very confusing.

How to calculate holiday pay (as an employee)

  • If you are working full time (5 or 6 days per week) and you are allowed the statutory minimum 28 days (5.6 weeks) of holiday. Your holiday pay accrues at a rate of 5.6/46.4 x 100 = 12.06%
  • If you work just one day per week, full time, your holiday entitlement equates to 5.6 days per year (28 days/5 days). Your holiday pay accrues at a rate of 5.6/359.4 x 100 = 1.56%

Next

  • What are the special rules for certain types of worker: how do I know whether I am employed or not?
  • How to work out your tax if you are employed?
  • How to work out your tax if you are self employed?
  • How you are taxed, show your taxes are paid.
  • What are employment rights and benefits?
  • How do you work out what you should be paid and the cost to the engager?
  • What expenses can you claim as when you are self employed
  • What expenses can you claim when you are an employee
  • Pros v cons: is it worth being self employed?
  • Starting in business checklist

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