What is the difference between employed and self employed?
An employed job tends to be the way most people earn money; they head out each day to a place of work to carry out specific roles, often under supervision, and, at the end of the week, or month, get paid for the work they do. Their employer is responsible for deducting income tax, National Insurance, deductions such as child support, and now auto enrolment pension if the employee is in the scheme. It is up to your employer to find you work to do. At the end of employment you receive a P45 and at end of tax year a P60.
For those who are Self-Employed, you are working for yourself. It is up to you to find work, obtain new contracts or clients, perform the work when you need to, decide how it’s done and you usually use your own equipment to carry out the work.
Now often in the arts, entertainment and media industry, this gets a bit muddled. A clarinettist can be playing in an orchestra as an employed person, but sitting next to somebody on a 50% contract, employed on a freelance basis. To all intents and purposes, they are doing the same job but one has an element of job security and the other not.
A freelancer would normally raise invoices for their work, but it can be based just on a contract and money deposited in their bank and a pay slip issued. Pay slips tend to say ‘employed’ but the giveaway is that there is often an ‘NT’ tax code, no National Insurance deducted or holiday pay given as it is inclusive in the hourly / daily rate and finally no pension deductions given. There is no P60 at the end of the tax year, no P45 when you leave and probably no party either!
During the tax year, you can be employed and self employed so it is vital you keep documents for them both separately. As an employed person, you cannot claim any employment costs such as travel to work as it is assumed to be covered by your salary. However, as a freelancer, you may be able to claim these costs subject to temporary verses permanent work place rules. I won’t go into that now.
Try to keep 2 different bank accounts; one for everyday life including PAYE work and one for self employed work. The only transactions that go through the self employed account are income and expenses related to freelancing and the freelance business. It will make life so much easier if you do this.
What you must ensure you do is declared your employed income and self employed profit on your tax return. You only get one personal allowance per tax year spread over all income. Your tax return shows gross salary, profit from self employment as well as other income such as rental profit. Add all that up, deduct the personal allowance and that is the amount you get taxed on. Multiply out by the income tax rates (ignoring National Insurance for the self employed) and that gives you your tax liability. If you have had employed income, then any PAYE taken is deducted from the total liability, so you are not being taxed twice.
Hope that helps.