There are specified differences between someone who is self employed and another person who is employed by a company and it is crucial to make the correct distinction immediately. The employment status will determine the class of National Insurance Contributions to be paid and income tax. The employment status can be determined by the terms and conditions of employment.
If you are responsible for the success or failure of your business, you will be classed as self employed. If you can make decisions regarding who, when or where you work then you will also be classed as self employed. Similarly, if you provide the tools to carry out a job and are free to hire someone else to do some of the work, you will probably be classed as self employed. You will most likely be classed as being employed if you have to carry out specified tasks as given by your employer without being able to recruit any outside help. If you are told when and where to work, you are probably classed as employed. If you are paid a regular amount for the hours worked, including overtime, you will be classed as employed.
It is possible to be employed by an employer and also be self employed simultaneously. A person may be employed part of the week by an employer, but may also have their own business which they run part time and would therefore be classed as self employed. Your employment income and income from self employment are treated differently for tax and National Insurance purposes. Employment income will be taxed through PAYE, with necessary deductions of income tax and Class 1 National Insurance Contributions being made by the employer. If a person is also self employed, Class 2 and Class 4 National Insurance Contributions may have to be paid. Each year a self assessment tax return is completed, giving details of self employment income, employment income and any other income received which is taxable. Employment pages should be completed to provide details of earnings and any tax and National Insurance already paid.
There are many advantages and disadvantages to being self employed or employed. Being self employed has tax advantages, as you may claim expenditure and tax reliefs for items which are used for the business. Becoming a limited company offers more tax advantages, although it can be a complex solution requiring professional advice. As a self employed person, you may choose your jobs and work only when and where you want. A business which is run from home eliminates the daily commute into a place of work, saving time and money. However, being self employed doesn’t offer a guarantee of work or income.
Occasionally, you may find that available work dries up and you don’t receive any income that month. You are also dependent on invoices being paid in a timely manner, which can also affect income. If you are sick and can’t work, you won’t be paid for the time off work.
Employment offers stability as work is usually guaranteed for a set number of hours and days each week. You will usually be paid at the same time every week or month so that you can budget easily. Any illness will probably be covered by statutory sick pay or sick pay from your employer. Being employed also provides the chance to join a company pension scheme, giving security for later in life when you decide to retire.
Both employment and self employment have distinct advantages and disadvantages. You have to decide whether you want the security of regular employment, or want the freedom of self employment.
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