Employed vs self employed witch pay more tax in the UK?

If you work in the UK, you may be wondering how your employment status affects the amount of tax you pay. Are you employed or self-employed? And what are the differences between the two options?

Employment status: Employment status is a legal term that determines your rights and responsibilities at work. It also affects how you pay tax and National Insurance contributions. There are three main types of employment status in the UK:

- Employee: You work under a contract of employment and have certain rights, such as paid holiday, sick pay, and minimum wage. Your employer deducts tax and National Insurance from your salary before paying you.

-Self-employed: You run your own business and are responsible for finding customers, setting your prices, and managing your expenses. You have more flexibility and control over your work, but also more risks and responsibilities. You pay tax and National Insurance on your profits after deducting your allowable expenses.

Worker: You have a contract or arrangement to do work or services for someone else, but you are not an employee or self-employed. You have some rights, such as minimum wage and holiday pay, but not others, such as sick pay or redundancy pay. You may pay tax and National Insurance through your employer or by yo

urself, depending on the arrangement.

You can use the Check Employment Status for Tax (CEST) tool to find out if you, or a worker on a specific engagement, should be classed as employed or self-employed for tax purposes. Tax rates When it comes to paying income tax, there are some differences in the tax rates you pay compared with employees. In 2023-24, self-employed workers and employees pay:

0% on the first £12,570 you earn

20% on income between £12,571 and £50,270

40% on income between £50,271 and £125,140

45% on income over £125,1402

However, there are some differences in how you pay tax and National Insurance contributions depending on your employment status. Tax payments If you are employed, your employer deducts tax and National Insurance from your salary before paying you. This is called Pay As You Earn (PAYE). You do not need to file a tax return unless you have other sources of income or need to claim certain reliefs or allowances. If you are self-employed, you are responsible for reporting your income and expenses to HM Revenue & Customs (HMRC) and paying tax and National Insurance by yourself. You need to register as self-employed with HMRC and file a Self Assessment tax return every year. You also need to make payments on account twice a year towards your tax bill. National Insurance contributions National Insurance contributions are payments that fund certain state benefits, such as the State Pension, maternity allowance, and unemployment benefits. If you are employed, you pay Class 1 National Insurance contributions at 12% on your earnings between £9,568 and £50,270 a year, and 2% on any earnings above that3. Your employer also pays Class 1 contributions on your behalf at 13.8% on your earnings above £8,840 a year.

If you are self-employed, you pay Class 2 National Insurance contributions at £3.05 a week if your profits are above £6,515 a year3. You also pay Class 4 National Insurance contributions at 9% on your profits between £9,568 and £50,270 a year, and 2% on any profits above that.

Summary In summary, the main differences between employed and self-employed in UK in terms of percentage people are paying taxes are:

Employed workers have their tax and National Insurance deducted by their employer before they receive their salary.

Self-employed workers have to report their income and expenses to HMRC and pay tax and National Insurance by themselves.

Employed workers pay Class 1 National Insurance contributions at 12% or 2% depending on their earnings level.

Self-employed workers pay Class 2 National Insurance contributions at £3.05 a week if their profits are above £6,515 a year, and Class 4 National Insurance contributions at 9% or 2% depending on their profits level.

Overall, the difference between employed and self-employed individuals in terms of tax is very significant. Self-employed individuals pay a higher percentage of their income in taxes, but also have more control over their work and income. Employed individuals have a simpler tax process, but less control over their work and income. It is important for individuals to understand their tax obligations and seek professional advice if they are unsure about their tax status or liabilities.

Learn more: 1. gov.uk2. which.co.uk3. gov.uk4. uk.indeed.com5. cipd.org