You may have considered taking on self-employed workers at some point in your business career. It makes sense, in theory: you only pay them when they finish a job with acceptable quality, they aren’t entitled to employment rights (save for non-discriminatory ones), no 13.8% National Insurance Employers’ Contribution, and no up to 3% pension contribution.
However, it’s not as easy as all that. If it was, you’d have seen far more businesses opting to contract self-employed workers.
Self-employed workers – HMRC’s rules
HMRC has very stringent guidelines on how to work out if someone is self-employed or not. If you can’t justify someone’s status as a self-employed worker, you may both face financial penalties. This is because incorrectly declaring one of your employees as self-employed results in lower tax payment to HMRC.
Before contracting a self-employed worker, there are a number of things you need to check. The Smart Team has taken the time to include the most important areas of note in this article, but if you have further questions, don’t hesitate to get in touch.
Self-employed workers – Are they exempted from PAYE?
If you already have direct employees in your company, you’ll be familiar with the PAYE system. PAYE means that you legally have to deduct tax from an employee’s salary prior to paying them.
A self-employed worker is paid by invoice, not be PAYE. A self-employed worker must complete their own self-assessment tax return at the end of each year. You can check if the self-employed worker you wish to engage with is exempted from PAYE by asking the following questions:
- Have they registered for a business themselves?
- Are they solely accountable for the profit/loss and success/failure of the business?
- Can they employ people to do the work?
- Have you agreed on a fixed payment sum, regardless of when the work is completed?
- Are they using their own personal money to buy tools and/or business resources for the job?
If you find the answer to all of the above to be ‘yes’, you’re likely to be engaging with a self-employed worker and you won’t have to recompense that person via a salary.
Self-employed workers – Tax reference numbers
As a precautionary measure, it’s wise to check a potential self-employed worker’s tax reference number. This is to ensure they’re registered with HMRC and that HMRC know to send them a self assessment.
Self-employed workers – Employment rights
Although self-employed workers are entitled to non-discriminatory rights, as with all employees, they won’t be party to the employment rights reserved only for ‘employees’. These employee-only rights, according to the law, include:
- Paid holidays
- Legal sick pay
- Maternity leave
- Fair dismissal, after a year’s service
- Parental and paternity awareness and subsequent treatment
Self-employed workers – Insurance Checks
Your insurance must, first and foremost, cover you. Of course, sometimes insurance will extend to cover a third-party worker or subcontracted employee, but HMRC will want to see that its main purpose is to cover yourself.
Self-employed workers – the rundown
Hiring a self-employed worker does lead to a multitude of benefits, many of which fall under the category of responsibility for you.
They are responsible for their own taxes and managing their own resources. You can reap these benefits if you are strict in the way that you manage those who you employ – HMRC consider wrongfully declaring an employee as a self-employed worker to be blatant tax avoidance.
If you have questions regarding artificial employment, or want to check you’re within guidelines, don’t hesitate to get in touch with SMART team on 01202 577 500 or email [email protected].co.uk.