If you want to start work, or maybe your own business, what is the difference between being employed or self-employed?
This a freeview guide.
Alternatively, you might be applying for a job and the person posting the job advert 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?
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 having deducted these from your pay before you receive it.
Agency work
- If you are engaged via an employment agency, special rules apply, jump to: Starting work 2: Special rules for different types of worker.
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 are 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? |
Zero. |
Zero 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 six hours is reasonable. |
20 minutes for every six 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 in your employer's 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 that 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, but the 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 (CEST).
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.
Your 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:
For 2023-24:
- £3.45 per week in Class 2 National Insurance contributions when your self-employed profit exceeds £12,570 per year, plus
- 9% Class 4 National Insurance on your profits in excess of £12,570 per year (2% of profits over £50,270), plus
- 20% Income Tax on profits after deducting your personal allowance of £12,570 per year.
- This 20% rate applies to the first £37,700, with 40% due on the next £87,440, and 45% thereafter.
- Where income exceeds £100,000, the personal allowance is gradually removed.
For 2024-25:
- Compulsory Class 2 NICs will be abolished.
- Main rate Class 4 NICs reduce from 9% to 6%.
- See National Insurance rates
Pension contributions
- Employees are automatically enrolled in an employer pension scheme.
- 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 contributing 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 (five or six 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 & when to register for tax
- How you are taxed, how your taxes are paid.
- What are your 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 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
Agency/umbrella tax-avoidance risk
How to check whether your agency is putting you into an illegal tax avoidance scheme.
Are you enjoying our content?
Thousands of accountants and advisers and their clients use www.rossmartin.co.uk as their primary TAX resource.
Register with us now to receive our receive our FREE SME Topical Tax Update & newletter
