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Starting Work: Self employed or employed?

Self-employed vs employed: Key differences

  • If you are self-employed, you work for yourself, you do not have any employment rights and you pay your own tax.
  • If you are an employee, you work for the employer. You have employment rights and your employer accounts for PAYE and National Insurance to HMRC and deducts these from your income before it pays you.

Employment status

You can check your employment status using HMRC’s Check Employment Status Tool (CEST).

Paying tax

Self-employed people have to calculate their profits for tax purposes.

Your profit is calculated as:

Your income from self-employment less: your allowable expenses

You then pay:

£3 per week in Class 2 National Insurance contributions when your self employed profit exceeds £6,365 per year, plus

12% Class 4 National Insurance on profits in excess of £8,432 per year, plus

20% Income Tax on profits after deducting your personal allowance of £12,500 per year.

Pension contributions

  • Employees are automatically enrolled in pensions.
  • A self-employed person will need to contribute 8% of profits to a personal pension scheme in order to ensure their pension is funded in a similar way. Most employees will be contributing 5% of their income and their employers will be contributing a further 3%.

Holiday pay

  • The self-employed do not qualify for holiday pay.
  • For employees, holiday pay is calculated in different ways depending on the employer and this can make it very confusing.

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