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If you want to start you own business, what is the difference between being employed or self-employed? 

Alternatively, you might be appling for a job and the person posting the job advert tells you that you are going to be self-employed.


Self-employed v employed: Key differences

Agency work

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

Payment for your services

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:

£3.05 per week in Class 2 National Insurance contributions when their self employed profit exceeds £6,515 per year, plus

12% Class 4 National Insurance on their profits in excess of £9,568 per year, plus

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

From 6 April 2022

Pension contributions

Holiday pay

How to calculate holiday pay (as an employee)


Next

Agency/umbrella tax-avoidance risk
How to check whether your agency is putting you into an illegal tax avoidance scheme.


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