Am I employed, self-employed, both, or neither?
Whether you are employed, self-employed, both or neither will make a difference to the amount of tax and National Insurance contributions (NIC) you pay, as well as how you pay. You need to know which of these apply to you, so that you can comply with your tax obligations and claim tax reliefs available to you. On this page, we tell you where you can find out more about employment status and discuss your position if you work through an intermediary like an agency, umbrella company or limited company.
Am I employed or self-employed?
When you start working for someone, it is their obligation to understand whether the law sees you as their employee or sees you as self-employed – your employment status – in order to decide whether they need to operate Pay As You Earn (PAYE) on your wages.
There is no straightforward legal definition of what it means to be employed or self-employed. There is information on the issues to consider and what to do if you are unsure if you are being treated as employed or self-employed properly, in the self-employment section. We also give more information on the following topics in that same section:
- when you are likely to be employed;
- when you are likely to be self-employed;
- what to do if you are still unsure of your employment status;
- whether you can be employed and self-employed at the same time;
- whether you can be neither employed nor self-employed;
- where you can find more information.
Employment status is also important for working out what employment law rights you have. Employment law status is different from tax law status. Tax law only recognises two types of status – employed and self-employed. For employment law, there are three potential statuses to consider – employee, ‘worker’ and self-employed.
Some information on deciding employment law status can be found on GOV.UK.
I am working through an agency – what is my position?
Some people find work through a temping agency.
In a typical temping agency situation, an agency will supply you to an ‘end client’. You will usually perform tasks under the day-to-day supervision of someone at the end client location but will send time sheets to the work agency, who will pay you.
Technically, you are usually neither an employee of the end client nor of the agency, however under a special tax law rule, the temping agency is usually deemed to be your employer (see below for an exception) and is responsible for deducting income tax and National Insurance contributions (NIC) under PAYE from the salary paid to you. They must also pay employer NIC. This is a cost to the temping agency, but it is usually covered in the fee that is charged to the end client by the agency.
In terms of employment law (which is a bit different from tax law) agency workers are usually ‘workers’ for employment law purposes (the category that falls somewhere between employee and self-employed) and as such are entitled to basic protections, such as being paid at least the national minimum wage (NMW) or national living wage and working time entitlements such as paid annual leave). You can find information on your rights as an agency worker on GOV.UK.
Under the Agency Workers Regulations (AWR), agency workers are also allowed to use any shared facilities (e.g. a staff canteen or childcare) from the first day they work in an assigned location. After 12 weeks’ continuous employment in the same role, agency workers get the same terms and conditions as permanent employees, including pay, working time, rest periods, night work, breaks and annual leave.
You can find out more about the AWR on GOV.UK. There are rules in place that aim to stop businesses from no longer using agency workers as they get near 12 weeks of continuous work. If you think you have been unfairly treated, you should contact ACAS on 0300 123 1100 (Text Relay 18001 0300 123 1100). There used to be an exemption from the 12 week rule where the agency worker was on a ‘pay between assignments’ contract, however from April 2020 this is no longer allowed.
⚠️ Note: If you are taken on by a temping agency on or after 6 April 2020, you will be entitled to a written statement of employment particulars on or before your first day. In addition, from 6 April 2020, agencies will be required to provide new agency workers with a document known as ‘a key information document’ prior to signing them up. This is intended to help agency workers understand how much they will be paid (once all the fees and deductions in the supply chain have been taken into account) and by whom (for example, an umbrella company) – so that they can make informed decisions about whether to take the work. You can find more information on GOV.UK
If you have a problem with a temping agency, then you can complain to the Employment Agencies Standards Inspectorate (EAS). You should also check if the agency is a member of a membership body for recruitment agencies such as the Recruitment and Employment Confederation (REC) and the Association of Professional Staffing Companies (APSCo), as they would probably be interested to hear of any problems with their members.
An introductory agency is one that assists you to find a permanent job by matching you with a potential engager. However it then has no further part to play in the arrangement and is not responsible for paying you after it has introduced you to a hirer. In this situation, it is for the engager you are matched with to pay you and also to decide if you are employed or self-employed and operate PAYE accordingly.
The special tax law rule mentioned above (where the temping agency has to operate PAYE) does not apply in genuine introductory agency situations. However, just because the special tax law rule mentioned above does not apply to make the agency your deemed employer, this does not mean that you are automatically self-employed for all purposes. All it means is that the agency is not your deemed employer. The engager you are matched with may still be your employer under general principles.
I incur lots of travel expenses as an agency worker – am I entitled to any tax relief?
Even though you may work on lots of different engagements and may incur substantial travel costs in getting to your various work locations, another special tax law rule says that agency workers are not normally entitled to tax relief on the travel and subsistence expenses they incur. This was one of the reasons for the emergence of umbrella companies in the temping industry – more on these below.
Travel expenses for agency workers are usually tax deductible if they are incurred while working (as opposed to getting to work) and include:
- Trips from your assignment office or other work location to visit a customer or other workplace, and can also include travel directly from your home to visit a customer or to another workplace (unless the journey is practically the same as the journey from your home to your normal place of work, for example, because the customer lives near your office).
- Travel expenses of those who have a ‘travelling appointment’ (that is, where the duties themselves inherently involve travelling) such as a delivery driver or meter reader, are also allowable. A person who holds a travelling appointment can get relief for all their travelling expenses (even where the journey starts from home!). Where he or she has to attend an office or depot at the start and end of the day to report in or receive instructions say, travel between there and home is not allowable.
- Although not ‘travelling appointments’ as such, HMRC also accept that travel expenses of agency workers who undertake a number of different jobs for an end client on the same day are allowable. This rule is intended to cover people such as home care nurses or domestic cleaners. In these cases, HMRC say that they will accept that the cost of travel between different jobs on the same day is allowable, however they will not accept a deduction for the cost of travel from home to the first job of the day or to home from the last job of the day. (Note there has recently been a case where HMRC’s stance on this has been called into question.)
- Following on from this, they also accept that when an agency worker incurs expenses in travelling between the premises of two or more end clients in the course of a day, the expenses of travelling from one to the other are allowable provided that the end clients were all obtained through the same agency, and the worker starts and finishes the day at his or her own home.
Neil lives in Reading and works for a construction temping agency. The agency arranges for him to work for a week as a labourer on a property development in the former athletes’ village in the Olympic Park. On day 3, he gets a call from the agency telling him to drop what he is doing (they have cleared it with the property developers) and spend the afternoon at the Maidenhead crossrail site as someone has phoned in sick and they urgently need an extra pair of hands. Neil gets in his car after his morning’s work in East London and drives about 66 miles round the M25 and up the M4 to Maidenhead. Generally, travelling expenses between two different ‘employments’ are not allowable, however under HMRC’s special rule they will probably accept a claim for the 66 miles in these circumstances. Neil can use the HMRC approved mileage rate of 45p per mile (for the first 10,000 miles and 25p thereafter), as the basis of his claim, worth £29.70. Neil can make a claim for tax relief at the end of the tax year, resulting in a tax refund of £5.94 (£29.70 @ 20%, as Neil is a basic rate taxpayer).
We provide further help and guidance on claiming back expenses, including a link to an annotated example of form P87 (the form you use to claim them), on our page What if I pay too much tax?.
Can I be a ‘self-employed’ agency worker?
Some temping agencies used to try to avoid having to operate PAYE for workers – this meant that their costs were reduced.
They did this by saying (or by using arrangements that said) that the worker was ’self-employed’, so that the worker has to pay their tax and NIC to HMRC themselves and there was no employer’s NIC to pay.
However, treating a worker as ‘self-employed’ when they should actually be treated as an ‘employee’ left the worker in a vulnerable position and meant that the government was losing money.
Since 6 April 2014, the government has tightened up the rules to prevent ‘employment intermediaries’ (temping agencies and other businesses involved in the supply chain), from being able to do this so easily. The special tax law rules essentially say that the only time an employment intermediary can escape operating PAYE is where the worker is under NO supervision, direction or control (or the right thereof) by any party as to the manner in which they undertake their work.
⚠️ Note: This test applies to agency workers working in the construction industry even though they often have their taxes deducted at source anyway (under CIS). Only if a worker is not caught under the supervision, direction or control test can an agency operate CIS rather than PAYE.
You can find HMRC’s guidance on supervision, direction or control on GOV.UK. It is likely that you would be under supervision, direction or control. Temping agencies are expected to report any payments made where they do not operate PAYE to HMRC. They also need to provide details of the workers and why PAYE was not used.
It may be tempting to turn a blind eye if PAYE is not being operated on your wages, as there may be perceived benefits to being ‘self-employed’. However, unless you are genuinely self-employed, it is best to tell the business paying you, that you want to be dealt with under PAYE, so as to protect yourself from any problems with HMRC later down the line. If they will not do this, you may decide to report them to HMRC so that their practices can be investigated.
You should be aware that recently, a variation of this arrangement is being used in the temporary worker industry. This ‘hybrid’ variation sees you being treated as an employee for tax purposes (so that PAYE is operated as is required under the special tax law rule) but you are being treated as self-employed for all other purposes.
This ‘elective deductions model’ or EDM, exploits the fact that employment law and tax law are different. In employment law you have three categories of person – employee, self-employed or ‘worker’. In tax law you only have employed and self-employed. Usually people have the same status for both employment law and tax law, however this is not always the case.
Self-employed people do not have the rights and protections that ‘workers’ have under employment law (remember agency workers are usually ‘workers’ and are very unlikely to be genuinely self-employed for employment law purposes). Putting workers in these ‘EDM’ arrangements saves the employment intermediaries concerned money, however, is unlikely to benefit you in any way at all (in particular your key rights like minimum wage, holiday pay and auto enrolment are bypassed). As such, you should think very carefully about accepting such terms and conditions.
How can I better manage my tax position if I am an agency worker?
Due to the way the system works, PAYE may not always operate smoothly for agency workers who change temping agencies a lot.
Jazz signs up for a marketing agency and starts an eight-month long assignment for them in April 2022 during which she earns £1,200 per month. A tax code of £1257L is allocated, which tells the agency she can have £1,048 of tax free pay each month and that tax of £30.40 is due on the rest (over eight months this equals £243.20). She has a few months off, then finds an assignment through another agency (she wants to stay on the books of the first agency in case they come up with a better role). Because this is technically a second job, a BR tax code will be allocated meaning 20% tax is deducted on every pound. She earns £250 a week for 8 weeks. Her weekly tax deductions are therefore £50 (£400 in total over the 8 weeks). At the end of the tax year, because of the availability of the £12,570 personal allowance, Jazz has overpaid £643.20 tax (that is, everything that was deducted). This will eventually be refunded to her by HMRC after the end of the tax year.
However, there are a number of simple things that agency workers can do to help ensure PAYE operates as smoothly as possible for them throughout the year:
- If you have decided to finish with an agency, do not just assume that they will know to close down your payroll record once your last assignment has finished. Make sure you inform them you are leaving and request your P45. Unless you do this, the agency may consider that you are available for work and will keep you on ‘the books’ until they carry out a database cleansing exercise. This means 1) that you will not be able to provide your new employer with a P45, meaning an emergency tax code will need to be used and/or that 2) HMRC will have a ‘live’ employment record for you, meaning that they may consider a 20% flat rate deduction appropriate for your new job.
- On the other hand, if you have not worked for an agency for a while, but don’t want your P45 – you should keep in touch with the agency, as if you don’t make contact for some time, then the agency may issue a P45 in line with HMRC’s guidance that unless an ‘irregular payment’ indicator is set on an employer’s payroll system for a particular employee, there will be an automatic cessation of the individual’s employment record should the employer stop sending payroll information for a period of time.
- Sometimes the issue of a P45 by a former agency can be delayed (often due to large numbers of workers coming and going). It may be useful to know that by law, you must be issued with a P45 as soon as possible once you have finished your job. P45s may now also be issued electronically (for example as an email attachment) – hopefully making it easier for you to get it.
- When you receive it, keep your P45 somewhere safe so you are able to provide it to your new employer – this may sound obvious, but please be aware that it is not possible for employers to issue duplicate P45s in the event that the original is lost or destroyed.
- Where you do not provide a P45 or a starter checklist, emergency tax will likely take the form of a flat rate 20% deduction (code ‘0T’ – meaning you have no personal allowance allocated to you), even if you only have one job; however this can be displaced by providing your P45 or a starter checklist to your new employer.
- If you are on the books of two agencies, consider if you can split your personal allowance (we explain more about this in our guidance on having multiple jobs).
What if I’m asked to work through an umbrella company?
Many agencies don’t like operating PAYE for the people they find work assignments for and so they ask them to work through an umbrella company, in order that the umbrella company can take on this function. See below for more information on umbrella companies.
A good agency should make sure the umbrella company they are handing you to meets all its legal responsibilities. They should also make sure they hand over sufficient funds to cover all the employment costs that the umbrella company will now have. This includes the gross pay rate advertised to you (‘the agency rate’) plus all of the costs of employment (for example holiday pay, employers NIC, auto enrolment costs) and the margin. These things together make the ‘umbrella company rate’ (the rate paid by the agency to the umbrella company). This money becomes the umbrella company’s income, from which they will then pay you your wage. It is important that you are clear on what rate your agency is quoting you to work through an umbrella – is it the ‘agency rate’ or is it the uplifted ‘umbrella company rate’. It should be the latter (uplifted rate).
The following example explains how this works:
Bob’s agency finds him an assignment for £175 a day (gross). On top of this, there are employment costs for the agency of about £55, meaning that the amount the end-client pays the agency is £230 (plus a margin). If the agency pays only the £175 to Bob’s umbrella company, then Bob is going to be very disappointed when he gets his first payslip, as he will see that all the umbrella’s employment costs have come out of the £175. Bob needs to make sure that the agency pays the umbrella the £230 they received from the end client.
Unfortunately, some agencies do not uplift the rates properly. Some can also be incentivised by a commission into encouraging you to join up to certain problematic umbrella companies (more on this below), and in these situations, if you are unhappy or uncertain about what you are being asked to sign up to, you should think very carefully about how to proceed.
I am working through an umbrella company: what is my position?
Sometimes an agency will ask you to work through an umbrella company. An umbrella company is an employment business that takes on agency workers as its own employees. Thus, if you are working through an umbrella company, you normally become an employee of the umbrella company. They then have to deal with your pay, tax, and other legal obligations, just like any other employer.
You can read more about umbrella companies in our factsheet on working through an umbrella company, which we have created in partnership with PRISM, a not for profit umbrella company representative body.
The factsheet covers a range of issues on which workers are likely to have questions including holiday entitlement and other employment right issues, the availability (or otherwise) of travel expense relief and why they may have been handed over to an umbrella company by an agency in the first place. It includes a helpful diagram explaining how umbrella companies work, a sample payslip to help demystify the sometimes confusing payslip entries and links to more help, including an article written for IWORK website, in which we explain some of the terminology used in the umbrella company sector for those new to this way of working.
Very importantly – on the basis that workers passed to an umbrella company should be offered an ‘umbrella company rate’, which should always be higher – it includes a ‘ready reckoner’ to help workers understand whether the rewards they are being offered through an umbrella company are roughly equivalent to what they might have otherwise received, once the various deductions the umbrella company has to make have been considered.
Travel and subsistence
Traditionally umbrella company employees enjoyed tax and NIC relief on their home to work travel expenses (something not available to agency workers), due to the special type of employment contract they worked under – an ‘overarching’ contract of employment (or an ‘umbrella’ contract).
Essentially, these contracts provided a framework within which a worker’s successive work locations could be turned into ‘temporary workplaces’, supporting the payment of non-taxable and non NICable home to work travel expenses to them by the umbrella company. To the extent that these expenses were paid to workers in lieu of ordinary taxable salary (as opposed to on top of it), there was also an employer NIC saving of 13.8% on the value of the expenses.
Since April 2016, the rules around relief for travel expenses from home to work if you work through an umbrella company have been really tightened up. You can read more about some problems with umbrella companies that led up to the April 2016 change in our report.
The April 2016 rules say that relief for home to work travel and subsistence expenses is restricted where a worker:
- personally provides services to another person
- is employed through an employment intermediary (such as an agency or umbrella company)
- is under the supervision, direction or control (SDC) of any person in the supply chain (or the right thereof).
If all of the above apply, each engagement the worker undertakes will be a separate employment for the purposes of obtaining relief for travel and subsistence; that is, the overarching contract is ineffective (resulting in the same approach as is already applied to agency workers).
- You should note that even where travel and subsistence expenses could still be allowed for tax purposes, for example because of multi-site visits, different rules mean that an umbrella company should probably not be reimbursing your expenses (apart from, possibly, mileage expenses) on a tax and National Insurance free basis as part of your normal pay.
But all of this makes it more expensive for the umbrella company to employ you as they cannot claim employer’s NIC relief on your travel expenses.
To get round the new rules, some unscrupulous businesses may try and say that you are not under the supervision, direction or control of any person (which would be highly unlikely unless you are genuinely self-employed) so they can continue making use of the special mileage expense rules; or even try and pay you in ‘loans’ or use other non-compliant arrangements such as those we describe below.
There are a huge number of umbrella companies out there and so the marketplace is very competitive. In order to win customers and generate profits, they often come up with new models to try to get round the rules introduced by government.
In particular, at the moment (and in addition to the poor practices around ‘travel and subsistence’ we are aware of as described above) we understand that the following non-compliant umbrella company models are currently in operation for low paid workers:
Elective deductions model: as explained above. This is a very harsh model which does not benefit workers at all. The problem, however, is that there is not an overarching body looking after employment law (HMRC only look after tax law). This makes the question of who people should complain to if they disagree with their employment law status unclear. (If you are affected, as a first step, you could try talking to ACAS or the Pay and Rights helpline.)
Wage theft: because of problems inherent in very short-term agency work when it comes to calculating holiday leave and pay, workers used to get extra pay on top of their hourly rate instead of being given paid holiday. However, this ‘rolled up’ system has now been deemed unlawful, meaning many umbrella companies accrue holiday pay for workers instead and pay it out at the time the annual leave is taken. If a worker is not on a rolled up system and leaves an umbrella company having taken fewer holidays than they are entitled to, they should be paid in lieu of the untaken holiday – but it is our understanding that this does not always happen. It seems there can also be problems if holidays aren’t taken by the end of the holiday year.
Cloning and Cyber attacks: Cloning and cyber attacks are two risks for workers to be aware of. We outline the risk in our February 2022 umbrella company market Call for Evidence response.
Mini-umbrella companies: this model sees the formation of lots of individual companies, often with foreign nationals as directors. On the face of it, all is well as the worker will be having PAYE operated. However, in the background, workers are being put into mini companies, where the Employment Allowance is being claimed inappropriately. Despite an HMRC spotlight, and media/press attention, we have recently heard of someone seemingly in mini umbrellas – the key giveaway is that each of their payslips had a different PAYE reference. Further guidance which should be useful for workers can be found on GOV.UK.
Payroll-fraud: it would appear that some umbrella companies are calculating and taking deductions from people’s pay based on one set of (proper) pay figures but are then understating these pay figures in their submissions to HMRC thereby reducing the tax/National Insurance amounts that are calculated and that they pay over. If you work through an umbrella company, it is a good idea to check your Personal Tax Account regularly to make sure that the pay and tax details being submitted to HMRC by the umbrella company match your payslips.
Non-taxable payments: some highly aggressive umbrella companies set up arrangements where, instead of receiving normal taxable pay, workers receive payment in the form of artificial ‘non-taxable’ loans, investment payments, grants, credits and so on. This is very likely to be disguised remuneration (tax avoidance) – we explain more about it in our news article Agency workers: being promised the world by an umbrella company? Don’t fall for it!.
Any umbrella company that appears to offer higher than expected take home pay should be avoided as it is likely that they are doing something that is just not right, which may include operating this type of arrangement. You need to be really vigilant about being offered payment in the form of loans, grants, advances etc. (even if the arrangement has a ‘QC’s opinion’ or appears to have been ‘approved’ by HMRC – both of which really mean very little in this context).
As explained at the end of our recent article, HMRC probably will not go after the umbrella company for unpaid tax (they may not be able to as the umbrella company could be based offshore or could simply fold); they will go after you.
Some umbrella companies may pay you in non-taxable elements without your knowledge, as we explain below. You need to be extremely wary about being exploited in this way.
(If you have been in loan arrangements in the past and are now affected by the ‘loan charge’, we have published a series of articles looking at the situation in some detail, what it is, what is happening and where to get help – you can find the date they were published under the title.)
How can I avoid getting caught up in disguised remuneration?
Sometimes umbrella companies use disguised remuneration arrangements to pay their employees without making it clear that they are doing this. Such arrangements reduce their employer costs and obligations so there is a benefit to them of doing this.
Some possible warning signs of disguised remuneration schemes for you to be wary of are:
- Arrangements that offer to let you keep more of your pay than you normally would
- A contract of employment showing that you’ll only be paid the National Minimum Wage, when you know you’ll be paid more than that
- An agreement where you get payments that you are told are not taxable
- Perhaps receiving more than one payment into your bank account each pay period
- Perhaps paying a hefty fee – which you won’t be able to get back if the arrangements don’t work
- Confusing or unclear paperwork (contract/payslips etc.) – or none at all
- Information in your Personal Tax Account about the pay and tax details being submitted to HMRC by the umbrella company that do not match what you are being paid per your bank statements.
We set out the problem in more detail and what to do if you think you are in a disguised remuneration scheme in a previous article.
Not all umbrella companies act non-compliantly, but you should ensure you check any arrangements carefully. If you have concerns about a certain umbrella company, you should ask if you could use a different one. You should be aware that some agencies are incentivised by a commission into encouraging you to join up to certain umbrella companies, so they may push back. If this happens, you need to think very carefully about how to proceed. You may decide to report them to HMRC so that their practices can be investigated.
You should also check if the umbrella company is a member of a membership body such as Professional Passport or the Freelancer & Contractor Services Association (FCSA), as they would probably be interested to hear of any problems with their members.
If you are in an umbrella arrangement that you do not understand or that seems different to what we have covered here, please let us know, as this will be very useful to feed into our work.
Where can I find more information on umbrella companies?
We published a factual report looking at the umbrella marketplace in 2021. The title is: ‘Labour Market Intermediaries: A technical report outlining how umbrella companies and other intermediaries operate in the labour market and the implications for workers who use them’.
The purpose of this report is to look at two areas:
- The nature and scale of the use of labour market intermediaries, for the large part, focusing on better understanding the use of umbrella companies.
- The nature and scale of the use of disguised remuneration schemes that are used to pay workers instead of traditional wages.
- The report will be useful for a wide variety of stakeholders – including workers – who we hope will be able to use it to help inform themselves, navigate the system and protect themselves.
Tips on umbrella company working from LITRG
We are concerned about the lack of understanding about how umbrella companies work by the workers who use them. We are offering people the following tips on how to find a safe, compliant umbrella company. These tips come from what we have learnt through our research into the marketplace.
- There is no single definition of an umbrella company. Anyone can set up a company and label itself an umbrella company. Some umbrella companies are not compliant with employment and tax law and the sector is currently unregulated. It is vital that you are on guard.
- In particular, be aware that some agencies are incentivised by a commission into encouraging you to join up to certain umbrella companies. Do not go with an umbrella company just because it is on your agency’s Preferred Supplier List, or just because it has certain accreditations – you still need to do your research thoroughly.
- Be clear on what rate your agency is quoting you to work through an umbrella – is it the PAYE rate (the rate they would pay you if you worked through them) or is it the ‘uplifted’ rate (that is, the PAYE rate plus all the ‘on top’ employment costs the umbrella company will now have). As stated above, It should be the latter (uplifted rate).
- Make sure your umbrella company is not a disguised remuneration scheme! As explained at the end of our recent article, HMRC probably will not go after the umbrella company for unpaid tax; they will go after you.
- Make sure you do not get caught up with problematic ‘mini’ umbrella companies. There are obvious impacts to the Exchequer but also to you – as you will never be with any one employer long enough to accrue any rights, and you will have an unusual and fragmented employment record, which could impact on you in many ways.
- Check how the umbrella company will deal with your holiday pay – if it is not on a ‘rolled up’ basis ask them to confirm the circumstances in which you may lose the holiday pay (for example, if you do not request it before the end of the holiday year). If you leave the umbrella company, ask them to confirm that all outstanding holiday pay will be paid to you with your final payment.
- Do not get swayed by all the different ‘perks’ that may be advertised. Some of these may be worth very little, for example, same day bank transfers (which are pretty standard these days), or may not be relevant to you (for example, tailored mortgage deals). Some may carry an extra cost over and above the standard ‘margin’.
I work through a limited company: what is my position?
If you supply your services via your own limited company, you may do this, or have been asked to do this (by an agency or umbrella company for example), for many different reasons. But one of the main ones is that it can result in significant tax and National Insurance savings, as compared to being taxed like an ordinary employee, for both you and others in the supply chain that you supply your services in.
The cost savings arise for you because basically, you can receive income from the company as dividends, which are taxed more beneficially then salary. Cost savings arise for others in the supply chain, because if an agency or umbrella pays a limited company rather than a worker, then it is a business to business transaction and they do not have any ‘employer’ costs or responsibilities. There can also be an additional revenue stream created, from the fact that most workers in limited companies will need help from an accountant with running the limited company and so can be charged for this service.
However, setting up a limited (Ltd) company is very different from working through an agency or umbrella or just being an employee or self-employed.
A business which is run as a Ltd company will be owned and operated by the company itself. The company is recognised in law as having an existence which is separate from the person who formed the company and from the directors/shareholders. A company is liable to corporation tax on all ‘profits’. A company must file accounts in a specific format to Companies House and file corporation tax returns to HMRC.
In your personal capacity, you will be a director/shareholder of the Ltd company and also the person that the company hires out to provide services (you would usually set yourself up as an employee of the company to do this). As such, you may be receiving income from the company in the form of a salary and/or dividends (which are taxed at more beneficial rates than salary).
In this situation, the end client that you work for will pay your Ltd company for its services (or will pay the agency/umbrella company who will then pay your Ltd company), usually on production of an invoice (they should not pay you in your personal capacity). The Ltd company will have to run a payroll to process your salary correctly under PAYE and you should probably be completing personal tax returns to declare dividend income and pay any income taxes.
For general information on working through a Ltd company, see our dedicated page.
If you work through an agency or umbrella company and aren’t sure if you are also currently working through a Ltd company, you should double check with the agency or umbrella company. You could also search for your name on the Companies House website.
IR35/Off payroll working rules
If your Ltd company is not supplying goods, but services – your own services, for instance you are a IT contractor, care worker, teacher or labourer then things can get complicated. This is because your company will be a ‘Personal Services Company’ and you will have to consider the impact of the intermediaries legislation (commonly known as IR35 / the off payroll working rules). These rules ensure that individuals who effectively work as employees are taxed as employees, even if they choose to structure their work through a Ltd company.
Under IR35, if you would be an employee of the end client you are working for, but for the Ltd company (there is a tool on GOV.UK to help you decide this), then the Ltd company is supposed to tell HMRC and potentially pay them some extra tax. This will usually apply where money has been taken out of the company in the form of dividends – to make up for the fact that they are taxed more beneficially than salary. You can find an overview of the IR35 rules on GOV.UK.
Please note, these rules are particularly complicated and professional advice would be needed if this applies.
Because historically, IR35 has not been complied with or enforced consistently by HMRC, since April 2017, if a person is working through their own Ltd company in the public sector, then they are no longer in charge of determining if IR35 applies. The IR35 determination now falls to the public body and if it applies, PAYE tax and NIC are withheld at source on any payments to the Ltd company (even if the Ltd company is paid by an agency or umbrella company rather than the public body).
You can find more information about working through an intermediary in the public sector on GOV.UK.
The public sector reforms have been extended to the private sector from April 2021 (delayed from April 2020) but they only affect workers in Ltd companies that supply their services to medium and large size businesses (that is, those that meet two or more of the following conditions: annual turnover of more than £10.2 million, a balance sheet total of more than £5.1 million, more than 50 employees).
Those providing their services to ‘small’ clients in the private sector (as well as individuals, for example, homeowners needing an electrician or gardener) will still need to consider whether the old IR35 rules apply to them – these do not just fall away altogether post April 2021. In fact it is foreseeable that the old rules may start being better enforced after April 2021 – so you need to make sure you are clear on whether your client is ‘small’ and if so, what the IR35 rules mean for you.
More detail on off payroll working in the private sector
You can find a factsheet and summary of the new rules on GOV.UK. HMRC’s technical guidance can be found here.
Basically, the new rules in the private sector say that if you look like an employee for the medium or large end client that you work for in the private sector, then you should pay tax like an employee. However, because it is only a ‘deemed’ employment relationship, you will not get any of the employment rights that usually go along with being an employee.
This means that PAYE tax and National Insurance will have to be operated on the amount paid to the company for your services, by whichever entity is responsible for paying your Ltd company (this will probably be the agency or umbrella company). You should then be able to draw out the money from the company as either a salary or dividends without further deductions. You can read more about the requirements on GOV.UK. Further help and support with the changes from April 2021, including things like webinars, is available from HMRC.
The end client that you work for is responsible for deciding whether you look like an employee (as opposed to a genuinely self-employed person), by applying the general ‘status’ tests. They then need to pass the result to the entity responsible for paying your Ltd company so that PAYE can be operated as appropriate. If you are a lower-paid worker, you are not likely to have much autonomy over the work that you do for them, so you will probably be determined to look like an employee.
This is really the key difference between the new rules and the old rules. Under the old IR35 rules, the decision as to whether you look like an employee or not rests with your own Ltd company, whereas under the new rules, the end client makes the decision instead (with ramifications if they get things wrong). This makes it much more likely that the rules will be applied properly and that everyone will then pay the correct amount of tax and National Insurance in accordance with the law.
Indeed, the change from April 2021 is expected to affect how much tax hundreds of thousands of those people pay. As a result, some of those affected may decide to shift away from working through their own Ltd companies. If you work through an agency or umbrella company and have a Ltd company set up, you need to make sure you are clear on what will happen after 6 April 2021, for example, whether you will still be required to work through the Ltd company or not.
Things to note if you stop using a Ltd company after April 2021
If you fall under the new rules, post April 2021 the cost savings you may have received until now will disappear, so working through a Ltd company therefore becomes much less attractive, especially when you consider all the admin and hassle that usually goes with running a Ltd company. (Indeed, there will be so much potential cost and complexity in supply chains involving Ltd companies, that if you are a lower paid worker being asked to work through one post April 2021 – you probably need to ask yourself why.)
Therefore, you may wish to, or be asked to, stop working through your own Ltd company. Your options are then to try and get taken on directly by the end client as an employee, or carry on working ‘flexibly’, via agencies for example, but under PAYE. This will usually mean that you will need to work through an umbrella company, as agencies do not usually operate PAYE on workers’ wages themselves.
If you are asked to work through an umbrella company, please be very wary of the potential problems with umbrella companies we outline above.
If you stop working through your own Ltd company, you also need to take steps to ensure that your old Ltd company will be closed down properly.
If you are paying for accountancy services, arranged perhaps by an entity in the supply chain, you should be aware that they may not be prepared to deal with the winding up of the Ltd company as part of their normal fee. You should also consider whether there will be costs involved in terminating the accountancy services (particularly if you have signed up to pay for a ‘package’ of services on an ongoing basis).
These ‘extra’ costs may be unwelcome but the bottom line is that if you do not make sure that the Ltd company is closed down properly, you could be left with messy Ltd company and corporation tax compliance issues that could follow you around for many years.
Independent, professional advice may ultimately be needed.
This article was originally published on LITRG