© Chartered Institute of Taxation 2020

Introduction

You need to know if you are an employee or self-employed so that you understand how and when you have to pay your tax and National Insurance contributions – employed and self-employed people pay tax and National Insurance under different rules. If your employment/self-employment status is wrong, it may mean you are paying the wrong amount and/or type of tax and National Insurance.

Whether you are employed or self-employed depends on the facts. Be careful if someone offers you work and gives you the choice of being an employee or self-employed, or if someone you are going to work for tells you that you are self-employed. Some employers may try to treat you as self-employed, when in fact you are an employee, because this makes things easier and cheaper for them.

If any of these things happen to you, make sure you understand for yourself whether you are an employee or self-employed, or seek advice. You can find more information about employment status on the GOV.UK website: www.gov.uk/employment-status and on the ACAS website: www.acas.org.uk/checking-your-employment-rights

You also need to know whether you are an employee or self-employed so that you can understand your employment law rights – there is more information about this later in this factsheet. Technically, your employment status for employment law purposes is determined separately – it is not necessarily the same.

This factsheet provides basic information on the differences between employment and self-employment in the UK. It aims to help low-income people who would like to come to the UK, or who have already arrived, to understand more about the UK tax system. You should also read the factsheets about Personal Allowances, National Insurance and Short stays in the UK. These can be found at www.litrg.org.uk/tax-guides/migrants/guides-and-factsheets

Employed and Self-Employed

If you have two jobs, you can be both an employee and self-employed at the same time.

For example, you may work as an employed music teacher at a school during the day (employee) and give private piano lessons in the evening (self-employed).

LITRG is an initiative of the Chartered Institute of Taxation, registered as a charity number 1037771

30 Monck Street, London, SW1P 2AP

© Chartered Institute of Taxation 2020

Employment

The following factors suggest employment:

You have a fixed salary for a fixed numberof hours of work, (including part-timework);

You have entitlement to holidays, sick pay,maternity/paternity leave and similarbenefits;

You work when and where your employerdecides;

Your employer provides your tools,protective clothing, equipment andworkspace;

Your employer pays the compulsoryinsurances to cover your health, safety andlegal liability;

Your employer deducts any tax andNational Insurance contributions from yourpay and passes them on to HMRC;

Your employer gives you a payslip each payperiod showing a Pay As You Earnreference.

Self-employed

The following factors suggest self-employment:

You invoice the person for whom you aredoing the work in order to be paid;

You supply your own specialistequipment;

You run the risk of financial loss as well asprofit on the work;

You supply your own substitute if youcannot do the work for, say, sickness orholidays;

You insure yourself;

You work for a number of differentpeople;

You carry out the work where and whenyou please within sensible limits.

Find out...

You can use a tool on GOV.UK to help you decide for tax purposes if you are employed, self-employed or both: www.gov.uk/guidance/check-employment-status-for-tax

You can also contact the HM Revenue and Customs customer service team to request an opinion about your situation. Their contact details can be found here: www.gov.uk/government/organisations/hm-revenue-customs/contact/status-customer-service-team

LITRG is an initiative of the Chartered Institute of Taxation, registered as a charity number 1037771

30 Monck Street, London, SW1P 2AP

This factsheet is intended to provide general information only and does not constitute advice. Before taking any action, you should get appropriate immigration, benefit or tax advice from a professional adviser which is based on your particular circumstances. We have done our best to ensure that the information in this factsheet is up to date as of April 2020. You canread our full disclaimer on our website: www.litrg.org.uk/legal

Agency workers

If you work for an agency, which sends you to work at different jobs for different people, for tax and National Insurance purposes you are typically treated as an employee of the agency, even though technically you are not an employee of the agency or the person you end up working for.

In such cases, the agency manages your work and should deduct your tax and National Insurance contributions.

However, this is an area where you should be very careful, as some agencies may try to treat you as self-employed for tax purposes, or ask you to become the employee of an ‘umbrella’ company, because this is cheaper for them. It can be very confusing and there is more information about agency workers on the LITRG website and in our Agency workers factsheet:www.litrg.org.uk/tax-guides/migrants-and-tax/employment-and-self-employment/agency-workers

© Chartered Institute of Taxation 2020

EMPLOYEES – Income tax and National Insurance contributions

Your employer must deduct income tax and National Insurance contributions (NIC) from your pay before passing on to you the balance. This is known as the Pay As You Earn (PAYE) system. You should check your income tax to make sure you are not paying too much or too little (we tell you how to do this below). However, it is rare to over or underpay NIC under the PAYE system.

Your employer must provide you with a payslip each payday, whether weekly, monthly or otherwise. Your payslip shows your gross wages, the income tax and NIC deducted, and the net wages you actually receive.

Your payslip also shows your PAYE tax code (this tells your employer how much tax-free pay you are entitled to). You should check that the tax code on the payslip matches the tax code on your coding notice. HMRC should send you and your employer a copy of your coding notice.

If you have not received a coding notice, it is probable that you are receiving the basic personal allowance for the year. For example, in 2020/21 the basic personal allowance is £12,500, so your code should be1250L.

At the end of the tax year your employer must give you a form P60. This shows your total wages, income tax and NIC for the tax year.

The basic rate of income tax is 20% on income over £12,500 up to £50,000; you pay income tax at the rate of 40% on income over £50,000 (there is also a 45% rate for individuals earning over £150,000). There are different rates and bands for taxpayers who live in Scotland. You pay Class 1 NIC on income above £9,500at the rate of 12%; but on income over £50,000 you only pay at a rate of 2%.

LITRG is an initiative of the Chartered Institute of Taxation, registered as a charity number 1037771

30 Monck Street, London, SW1P 2AP

This factsheet is intended to provide general information only and does not constitute advice. Before taking any action, you should get appropriate immigration, benefit or tax advice from a professional adviser, which is based on your particular circumstances. We have done our best to ensure that the information in this factsheet is up to date as of April 2020. You canread our full disclaimer on our website: www.litrg.org.uk/legal

Employees – under or overpayments of tax

In most cases, the PAYE system means you pay the correct income tax by the end of the tax year, but not always. If you have not paid the correct amount of income tax, HM Revenue and Customs will usually send you a tax calculation (form P800) after the end of the tax year. There is more information on what you should do if you receive a form P800 for a tax year on the LITRG website: www.litrg.org.uk/tax-guides/employment/what-if-i-do-not-pay-enough-tax

Employees – claiming employment expenses

In a limited number of circumstances, you may be able to claim tax relief when you have to use your own money to pay for travel or things that you must buy for your job. Here, we are thinking of things like small tools, specialist clothing, professional subscriptions or business mileage in you own car. You can find more information about tax relief for employment expenses on the GOV.UK website: www.gov.uk/tax-relief-for-employees

Other differences between employed and self-employed

Employees enjoy many rights under UK law that the self-employed do not, for example protection against unfair dismissal, the right to maternity, adoption and paternity leave, statutory sick pay and statutory redundancy pay.

UK law often covers ‘workers’ as well as employees (a category of person that sits between employed and self-employed – agency staff are ‘workers’ for employment law purposes for example). While you might think of yourself as self-employed for tax, you might have more rights and protections than you think if you are a ‘worker’ for employment law purposes.

There is information on workers on GOV.UK: www.gov.uk/employment-status/worker

More information

You can find out more detail about some of the topics in this factsheet on the LITRG website: www.litrg.org.uk/tax-guides/migrants/employment-and-self-employment Getting help with your tax

You can find out where to get help with your tax situation on the getting help page at: www.litrg.org.uk/getting-help

Self-employed – Income tax and National Insurance contributions

You are responsible for paying the right amount of income tax and NIC directly to HMRC yourself.

If your trading income is more than £1,000 in a tax year, you must register as self-employed with HMRC. Failure to register may lead to a penalty. If you are self-employed, you must tell HM Revenue and Customs by 5 October after the end of the tax year in which you start self-employment.

You must also complete an annual tax return under the Self Assessment tax system. You should include your income and expenses for your business on the tax return, together with any other income and gains. You must pay any income tax and Class 4 NIC by 31 January after the tax year end – at which point you may also have to make an advance payment towards your next tax bill too. The basic rate of income tax is 20% on income over £12,500 up to £50,000; you pay income tax at the rate of 40% on income over £50,000 (there is also a 45% rate for individuals earning over £150,000). There are different rates and bands for taxpayers who live in Scotland. The rate for Class 4 NIC is 9% on earnings over £9,500 up to £50,000; but on income over £50,000 you only pay at a rate of 2%.

You must also pay fixed rate Class 2 NIC, (2020/21 £3.05 a week). You can pay these together with your Self Assessment income tax bill after the year end; alternatively you can spread the payments throughout the tax year.

You must submit the tax return by 31 October (if filing on paper) or 31 January (if filing online) after the end of the tax year it relates to, otherwise you may have to pay a penalty. For example, the tax return for the tax year 2020/21 is due by 31 October 2021 (paper) or 31 January 2022 (online). There is more information about deadlines and penalties on the LITRG website at: www.litrg.org.uk/tax-guides/self-employment/what-dates-are-important-self-employment

This factsheet is intended to provide general information only and does not constitute advice. Before taking any action, you should get appropriate immigration, benefit or tax advice from a professional adviser which is based on your particularcircumstances. We have done our best to ensure that the information in this factsheet is up to date as of April 2020.You can read our full disclaimer on our website: www.litrg.org.uk/legal © Chartered Institute of Taxation 2020

National minimum/living wage

The national minimum wage (NMW) applies to both employees and ‘workers’. This is an hourly rate, depending on your age and whether or not you are an apprentice. You may be entitled to the national living wage (NLW), which is the higher hourly rate if you are 25 or over. See the Short Stay in the UK factsheet at www.litrg.org.uk/tax-guides/migrants/guides-and-factsheets for more details. You can find out the current NMW and NLW rates on GOV.UK at www.gov.uk/national-minimum-wage-rates

Pension auto-enrolment

Auto-enrolment applies to both employees and ‘workers’. You may automatically be enrolled into a workplace pension scheme unless you actively opt out, that is, say that you do NOT want to join it. You may need to seek advice as to whether or not it is worth you paying into a pension while you are in the UK. You can find out more on auto-enrolment on GOV.UK at: www.gov.uk/workplace-pensions