Income tax - employers

This page will give guidelines for employers on determining employment status and payment.


After reading this you should be able to determine the employment status of a person who claims they are self-employed and intend to submit invoices for work done.

It is the responsibility of employing departments to determine the employment status of a person, i.e. whether they are employed or self-employed.

HM Revenue and Customs no longer issues letters stating that an individual can be treated as self-employed for work undertaken.

Self-employed status allows a gross payment to be made to an individual whereas payments to employees are subject to income tax and National Insurance.

The terms of each individual's working arrangement require consideration in order to determine how they should be treated.

It is not sufficient for the individual to say they are self-employed even though they may submit an invoice and state they return their income to the Inland Revenue. A person can be self-employed for one job but not for another.

The following points should be taken into account to determine an individual's status, but they are not conclusive:

  • control
  • provision of equipment
  • terms of payment
  • financial risk.

Control

The degree of control exercised over an individual is an important factor. If they are instructed what to do, how and when to do the work, then it is likely that they are an employee.

If the employer has the right to control the worker but chooses not to exercise that right, it is a pointer towards employment. If the person is given a task to complete by a certain date, but they can decide how and when to do the work, they could be self-employed.

If the individual is free to hire and pay someone else to assist them or to do the work in their place, this also suggests self-employment.

Provision of equipment

An employee is provided with equipment and materials to carry out their job. A self-employed person would be expected, at the minimum, to provide their own small tools and items of equipment and materials.

Terms of payment

There would normally be an agreed price for the job to a self-employed person that would include any expenses and overheads. However, payment by an hourly, daily, weekly or monthly rate, which is dictated by the employer, is a pointer towards employment.

Financial risk

A self-employed person would:

  • be expected to put right any substandard work in their own time and at their own expense
  • risk their own capital
  • make a loss or a profit.

These points would not apply to an employee.

You can also check the employment status of an individual by accessing the HM Revenue & Customs (HMRC) website (opens in a new window).

On the home page, there is a quick link to 'calculators and tools' where you can find the Employment Status Indicator (ESI) Tool that can be used to help establish the employment status of an individual.

By following the instructions and answering a series on questions, the ESI Tool will provide you with an indication of the individual's employment status. A copy of the enquiry details screen and ESI Result screen must be printed and saved as evidence should the employment status be questioned by HMRC in the future.

As employment status affects the income tax and National Insurance a person has to pay, it is important that the correct decision is made.

It is in your interests to verify a person's employment status correctly as any underpayments of tax and National Insurance, plus any additional penalties, would be met from your budget.