ARE WORKERS EMPLOYEES?

It is important to know whether a worker is employed or self-employed as there are many differences in the way in which they will be taxed. Broadly, employees are taxed under the PAYE system with income tax and Class 1 national insurance contributions (NICs) being deducted from payments made to them. Class 1 NICs are also payable by employers. In contrast, the self-employed pay income tax and Class 4 NICs direct to HMRC, and are also currently liable to Class 2 NICs.

Some important differences are:

• currently, self-employed people have a lower liability to NICs than employees (especially when taking into account the employer’s liability)
• self-employed people benefit from a cash-flow advantage in the timing of tax payments under self-assessment, compared with employees taxed under the PAYE system
• the rules allowing tax relief for expenses are generally more relaxed for the self-employed
• in some circumstances, an employer who incorrectly treats an employee as self-employed is liable for the income tax and NICs that they should have deducted under PAYE. HMRC may treat as a net amount the figure that was intended to be paid gross.