What sort of worker?

15 February 2010

Anybody who works for their living is regarded as being in employment. There are, however, different types of employment, and each comes with its own tax and legal obligations.

As far as taxation is concerned, employment can be separated into several categories: workers, employees, directors, the self-employed and contractors.

It is perfectly possible for someone to fall into more than one category or for someone to be treated as belonging to different categories under different parts of the law. In certain cases, it is the nature of the work that determines someone’s classification.

Different categories of employment also involve different tax and National Insurance treatments. It is essential, therefore, that employers understand how to classify the people who work for them so that the correct amount of tax can be paid in the correct way.

Employees

Somebody who works for a business can do so in one of two ways: as an employee or as a worker.

An employee will have a contract of employment with their employer, while a worker may only have a contract, if at all, for supplying a particular service to the business. A worker could be a freelancer, a temporary worker supplied by an agency or a casual worker.

Responsibility for paying an employee’s income tax and National Insurance lies with the employer; responsibility for paying a worker’s income tax and National Insurance usually, but not always, rests with the worker. Agency workers, for example, are regarded as employees of their agency.

Employees are taxed according to the PAYE system, which means they must pay Class 1 National Insurance contributions. The employer must also pay Class 1 National Insurance contributions for each employee.

Self-employed workers are self-assessed taxpayers, and pay Class 2 and Class 4 National Insurance contributions. Any business that uses self-employed workers does not pay any National Insurance on them.

Defining employees

Although there are no hard and fast rules setting out precisely what constitutes an employee, an employer will nevertheless need to decide whether a worker qualifies as an employee or not.

To help employers do this, there are certain criteria they should apply. If an employer can tell the worker how, when and which tasks to perform; if a worker is a part of the firm or business; if an employer has to offer tasks to the worker and the worker has to fulfil those tasks; and if the worker is not in business in their own right, then they may fairly be regarded as an employee.

The law in this area can be blurred at the edges, so it is important that an employer takes professional advice whenever they are unsure as to the employment status of a worker.

If an employer engages a worker on the assumption that they are self-employed, but the worker is subsequently deemed to be an employee, then the employer may have to pay income tax and both employee and employer National Insurance on the payments that have been made to the worker.

Self-employment

Categorising someone as self-employed is sometimes a question of measuring the level of independence they have in the way they work.

Usually a self-employed worker will be in a position to dictate the way their business operates; they will use their own money to fund the business; they will hold responsibility for any losses incurred by the business; they will supply most of any equipment needed to carry out their work; they will be able to allocate projects or tasks or work to other workers and will pay them out of their own pocket; and they will correct any mistakes, errors or sub-standard work in their own time and at their own expense.

If an employer wants to take on a worker as self-employed, as opposed to an employee, they must be sure these conditions are met. For example, the business should pay an agreed fee for a set amount of work or a project. The nature of the work and the duties of the self-employed worker should be clearly defined and agreed in advance. Within certain reasonable parameters, the self-employed worker should have the freedom to carry out the work in a manner of their choosing.

Company directors

A director of a limited company is considered to be an employee of that company, and for tax purposes is treated as such. This means a director pays income tax via the PAYE system, along with employee and employer National Insurance contributions.

A non-executive director can qualify as an employee or as the self-employed supplier of a service, according to the agreement that exists with the company.

Contractors

Contractors and subcontractors who work in the construction industry are self-employed but have access to a special tax scheme.

IR35

Sometimes a business will sell its services to a business or employer through a ‘third party’ or intermediary. This third party may be a partnership or a limited company. In such instances, IR35 rules apply. The rules are intended to find out if a worker would actually be an employee of the client but for the fact that their service is supplied through the third party.

Where there is a ‘third party’ or intermediary contract and it falls within IR35 rules, the employer does not take responsibility for any income tax or National Insurance when paying the worker.

This is only an outline guide, and any employer who is unsure as to the exact status of a worker should take professional advice on the issue.