Limited company

Practical Guide for Directors: Understanding the Difference between Employment and Self-employment

accountant service medway

Is it better to be an employed Director or a self-employed Director? This is one of the most popular issues among social entrepreneurs. No doubt, entrepreneurs want to receive the income from the organization in a tax efficient way.

When Directors are employed?

Office holders are employees. According to specific rules created by HMRC has specific rules when it comes to Directors. So, when you are a Director of your organization you are considered to be an office holder. What does it mean? Basically, all the payments you receive as a Director are meant to be a salary and subject to PAYE. Well, there is the option to count any activities that don’t form part of your role as a self-employed Director. There is sufficient distinction between the two roles. You have the chance to split your strategic and legal responsibilities as a Director from delivery on projects.

Is it possible for a Director to compare self-employment with any other job?

Yes! You may consider having other work as a self-employed individual. It should be an additional work. Else ways, it would be an artificial separation of your income for avoiding taxes. One more important thing to be mentioned! Honestly, this is not really recommended when you work full time for your company. The thing is, you simply do not meet the criteria for being self-employed.

Do you know who are trustees, and what rules apply to them in terms of employment?

Those are Charity Directors. Different rules apply to you if your company is a charity organization. Remember, there are restrictions on the number of trustees that can be paid. Usually, they cannot be paid for the duties as a trustee. Nevertheless, they can receive payment only for additional goods or services they provide. This applies only when your governing document allows payments to trustees. It is important to mention, that you cannot pay more than half of your board/trustees for goods or services. Also, the charity Director is cannot be involved in decision-making regarding the purchase or agreement.

Below you can find the HMRC rules on employment and self-employment for Directors:

The right to provide a substitute

In case a Director is employed he/she cannot send a substitute. A self-employed individual can send someone else to do the work. A Director cannot send a replacement, but he/she is able to send a substitute for any service delivery work you do. Well, this will be treated as self-employment income.

  • Mutual obligation

The employed Director is obliged to do as the organization, the so-called employer, requests. The company is obliged to provide work. In fact, if you are self-employed, you can reduce the amount of work if you wish. Well, in this situation the company is not obliged to provide work for you.

  • Control

The company controls pretty much everything. Namely, where, what, when and how your work is done. You know it, right? In case you want to have control over the majority of these, you should stay self-employed.

  • Provision of equipment

Do you know that an employee usually has the necessary equipment for the work provided by the organization, whereas a self-employed person has to supply the equipment on his/her own? I bet, you do.

  • Financial risk/profit

On one hand, employees usually have a little financial risk. On the other hand, they have no benefits from any profits generated. Employees still can have some benefits. This applies when they are considered to be a part of a bonus scheme linked to profits. If you are self-employed you face a lot of risk and in case when something goes wrong you have to correct anything at your own expense. On the other hand, potentially you make a profit if the work is completed way more quickly.

  • Contract length

This also good to know. For an employee the contract is usually open-ended with no fixed end date, but if you are self-employed you will usually be working for a fixed term contract.

HMRC does not see changes…

In case you were previously employed by the company, and then switch to self-employment, but continue to carry out the same duties, HMRC will count it as self-employment.

How to save money?

Self-employed workers will be way cheaper, because you do not have to pay Employer’s National Insurance Contributions and pension contributions to the salary. On the other hand, with the Employer’s National Insurance Allowance meaning you do not pay the first £3,000 of contributions. Sadly, it may not make much financial difference.

How about IR35?

The Intermediaries Legislation (IR35) treats the individual as an employee. In this situation the individual has own company and issues invoices for the work. What is interesting, in case of the limited company, they would be treated as an employee of the organization. So, pretty much any income received by the individual through their own limited company should be paid as salary and subject to PAYE. IR35 applies when the subcontract work to them from the company, and this is the only source of income for the limited company. If the Director is actually self-employed and does work for other people out of the social enterprise, has their own business cards, can send a substitute etc. then he can potentially be treated as self-employed for this work. In this situation the Director could invoice the organization from their own company.

We hope, that the information above was useful for you. Nevertheless, you should consider your personal situation and circumstances in order to make the most of your professional life.