So you think you are self employed, does HMRC agree? 8


As everyone probably already knows there are tax and national insurance advantages to being self employed and to employing casual workers on a self employed basis.

As an employee, on most of your income (assuming you aren’t a higher rate tax payer) you will pay 20% tax, 12% employees NI and your employer will pay 13.8% employers NI, so thats 45.8% in tax and NI.

If you are self employed the equivalents are 20% tax, 9% Class 4 NI and £2.50 per week Class 2 NI, plus you can claim business related expenses that you probably wouldn’t get as an employee.

Whether employed or self employed you will get a tax free allowance of £7475.

For full details follow these links:

http://www.hmrc.gov.uk/rates/it.htm

http://www.hmrc.gov.uk/rates/nic.htm

So why isn’t everyone self employed?

Why not start by taking the HMRC test known as the ‘Employment Status Indicator’?

https://esi2calculator.hmrc.gov.uk/esi/app/index.html

You can take the test as many times as you wish and record the answers but if the result says you are really an employee then you need to speak to your employer and discuss the risks and liabilities that they will potentially face.

The most recent HMRC case on Employment Status relates to Weight Watchers and because HMRC successfully argued that their leaders were employees and not self employed it will cost Weight Watchers an estimated £23.5m in back taxes. When employment status goes wrong its the employer that gets the bill and often can’t recover the back taxes from the ’employees’.

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/8501230/Weight-Watchers-to-employ-its-1700-slimming-leaders.html

http://www.telegraph.co.uk/finance/yourbusiness/7346758/Taxman-forces-slimmers-to-put-on-weight.html

One possible solution is to use Limited Companies, because a Limited Company can never be treated as an employee. Plus there are tax advantages in Dividends. But be careful of the IR35 Rules, follow my blog links to find out more.

https://stevejbicknell.wordpress.com/2011/09/10/consultants-beware-of-ir35-use-the-qdos-model-contract-free/

https://stevejbicknell.wordpress.com/2011/10/02/salary-vs-dividend-how-much-money-could-i-save/

https://stevejbicknell.wordpress.com/2012/01/04/things-you-need-to-know-about-dividends/

IR35 came into existance in 1999,  it was created to prevent workers previously employed from creating a limited company and then benefiting from lower taxes and national insurance through the use of dividends and expenses.

Follow my blog for more useful facts, tips, suggestions and ideas.

steve@bicknells.net

8 comments

  1. This is a really interesting topic Steve and reminds us that when determining employment status the courts, tribunal and HMRC will look at all aspects of the arrangement and no single test will be conclusive in all cases. In addition tribunals and HMRC may well have different approaches to the tests.

  2. A very relevant topic where HMRC are being much more robust in their tax collection efforts, especially for the small er trader who can easily fall into the trap as the Weight Watcher example shows. Thanks for this useful post.

  3. Different criteria have been applied for different purposes. There have been cases where individuals have been deemed self-employed by an employment tribunal (and therefore have no protection against unfair dismissal), but at the same time HMRC says they’re employed (and so can’t offset expenses against tax) – worst of both worlds!

  4. Pingback: What are the implications of being a Service Company? Q1 Page TR4 SA100 « Steve J Bicknell

  5. Pingback: What are the implications of being a Service Company? Q1 Page TR4 SA100 « CIMA Accountant

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