The Employment vs Self Employment Debate

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Determining employment status can be complicated – HMRC (and employment tribunals) may consider different factors when deciding, as there is no single legal definition.

There are essentially 3 types of working individual – an employee under a contract of employment with full employment rights, a worker (e.g. agency staff, short term casual workers and some freelancers) with core employment rights only, (such as minimum wage), or self employed, where there is no contract and therefore no fixed commitment, and the individual pays their own tax and National Insurance Contributions.

Whilst self employment means PAYE & NI won’t be deducted each month (more to spend!), you will still be liable for taxes later, just in a different form (Corporation Tax, if you have set up a Limited Company for the purposes of self employment) But the perk of delayed taxation comes with a price – being self employed means that you are not eligible for the standard rights that come with an employment contract, such as sick pay, holiday pay, etc. In this respect, you need to work out what is best for you, at your current life stage.

The added complication is “deemed employment” and IR35, the tax legislation that is designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a Limited Company, but who would be an employee if the intermediary was not used. Such workers are called ‘disguised employees’ by HMRC. In short, if the new IT contract is your only job, then HMRC may class you as employed, in which you must carry out a “deemed salary / schedule E calculation” for each tax year on deemed income received from relevant contracts. This will be net income (excluding VAT) less 5% allowance to cover the administration costs of the business, in addition to the 5% allowance the contractor can claim direct costs such as travel, computer costs, subsistence, training and sub-contractor costs providing these costs meet the “incurred wholly and exclusively on behalf of the business” test.

As you may have noticed, there is no short answer to this question – for tailored advice, contact us.

 

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