What is Self-Employment?

Self-employment means you work for yourself and are responsible for finding your own work. Some people commonly refer to themselves as a sole trader but it means the same thing in the eyes of HMRC.

For tax purposes being self-employed means you’ll need to register with HMRC so that you can declare your earnings and work out your own taxes. It’s the opposite to when you are employed by someone and get a tax code and payslip, with your employer responsible for working out your taxes and paying it to HMRC on your behalf.

[This is part of the Understanding Self Employment Series]

Are You Employed or Self-Employed?

It’s important to distinguish whether you are employed or self-employed because it determines your tax status and whether you need to report your earnings to HMRC yourself, using what is known as self assessment.

You’ll most likely be self-employed if you:

  • Are responsible for finding their own work and making sales;
  • Need to buy your own equipment to deliver a job such as a computer, mobile phone or machinery;
  • Set up a website to market your services;
  • Have the ability to hire someone to do the work or job you have won;
  • Can decide whether or not to accept a job;
  • Are responsible for the success or failure of a job;
  • Work for a number of people rather than just one company;
  • Are not entitled to employment rights nor receive sick pay or holiday pay;
  • Have to arrange your own pension;
  • Earn more than £1,000 of untaxed income;
  • Have to fund the cost of delivering work before your customer pays you;
  • Get paid income from your clients and customers with no tax deducted from it, but is taxable.

You are probably employed by someone if you:

  • Receive a payslip from your employer and they pay your tax deductions over to HMRC on your behalf;
  • Don’t carry any risk when it comes to the success or failure of the business you work for;
  • Have employment rights;
  • Are entitled to receive sick pay and holiday pay;
  • Have an employment contract and set working hours;
  • Are not considered a business owner;
  • Get told what work you need to do, how and when by;
  • Have a line manager.

Examples of Self-Employment

Example 1

Penny is a yoga teacher. She has to search for her own students and has set up her own classes, renting a space in a local gym. She has to pay the gym rental whether her classes are full or not, take out insurance and advertise the class herself. Penny is, therefore, a self-employed yoga teacher, she isn’t employed by the gym.

Example 2

Tom is a website designer. He is contracted to work in an office 4 days a week where he is given work to do by his manager who checks the quality of each website he designs. Tom is employed by the business he works for and should expect to receive a payslip with tax deducted in accordance with his tax code.

What to Do If Your Are Unsure Whether You are Employed or Self-Employed

It can sometimes be confusing to determine your tax status. Especially since the rise of the gig economy where companies like Uber and Deliveroo have, to some extent, exploited the self-employment rules by hiring workers, to work for them exclusively, but without offering employment rights and means they pay less national insurance they pay, amongst other things.

If you aren’t sure what your employment status is, start by going to the HMRC website where you can get help deciding using their free tool which checks your employment status for tax. You can also speak to the person you are working for, if you feel comfortable doing so.

Can You Be Employed and Self-Employed?

Yes! And in fact, many people choose to be employed and self-employed for many reasons:

  • They need to earn a steady income while they set up a business on the side;
  • As a way to earn extra money to invest in their business;
  • To earn money on the side of their full-time job as a way to make some extra cash;
  • They are in the early days of self-employment and take on an employed role while building their own client base.

You may need to declare and pay tax on your self-employment income, separately to your employment income. I’ve written a separate guide with more details covering the tax implications of being employed and self-employed.

Hobby Businesses

Some people have a hobby, which, even though they may make some money out of, are not doing it for commercial reasons or with a view to being in business. In these cases, your trade may be classified as a hobby business meaning that the income is not taxable. HMRC are VERY prescriptive about what they define as a hobby to prevent people from avoiding tax so make sure you understand the criteria before you assume what you are doing is a hobby.

Key Takeaways

  • Being self-employed means you are your own boss and have individual contracts with your clients;
  • Self-employment requires you to register with HMRC for self-assessment, declare your income and work out your own taxes;
  • Self-employment gives you the freedom to pick and choose who you work for but also means you are not entitled to employment rights, holiday pay or statutory sick pay;
  • Businesses like Uber and Deliveroo use the label of self-employment to contract with workers who perhaps should be employees but this is under review by the UK government as we speak.

[This is part of the Understanding Self Employment Series]

About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of www.goselfemployed.co - the UK small business finance blog for the self-employed community. Here she shares simple, straight-forward guides to make self-employment topics like taxes, bookkeeping and banking easy to understand.