Employment status is a crucial factor in determining your rights, tax and reporting obligations. Working through intermediaries like agencies, umbrella companies, or your limited company can get confusing. This article explains the key things you need to know.

Am I Employed or Self-Employed?

When starting work, it’s important to determine whether you are employed or self-employed. There is no legal definition, but factors like supervision, control, financial risk, and integration indicate employment. Self-employment involves more freedom and financial risk. HMRC has an online employment status checker tool to help decide. If you need more clarification, seek professional advice. Being incorrectly classified could lead to future tax problems.

Key indicators of employment status:

• Supervision, direction and control over your work. Following set hours or procedures indicates employment.
• Financial risk. Employees have steady income regardless of company performance. Self-employed persons risk their own money and can make losses.
• Equipment and materials. Employees are often provided tools and equipment by employers. Self-employed typically use their own.
• Integration into business. Being fully integrated into the hiring company’s operations indicates employment.
• Basis of payment. Employees are paid regularly—self-employed invoice for services rendered.
• Exclusivity. Employees may be restricted from working elsewhere. The self-employed can work for multiple clients.
• Employee benefits. Paid leave, pension, and insurance benefits indicate employment status.

You can technically be self-employed and employed with multiple income sources. You can also be neither if you are currently working.

Seeking expert help is recommended if employment status needs to be clarified. Being treated incorrectly could lead to tax arrears, penalties and loss of employment rights.

Working As An Agency Temp

Temping agencies find you temporary work assignments. You’re not their legal employee, but special tax rules make the agency responsible for operating PAYE on your pay. This covers income tax and National Insurance contributions (NICs).

Agencies must also pay employer NICs. Your employment status for tax purposes is deemed ’employed’ when temping, even if contracts state you’re self-employed or an independent contractor.

As an agency worker, you have basic employment law rights like minimum wage, working hours protections and holiday pay under the Agency Workers Regulations. After 12 weeks in the same role, you get equivalent pay and conditions as permanent staff at the client site where you’re placed.

Your pay, tax and NICs are handled through the agency’s payroll. Ensure you tell them when finishing an assignment to get your P45. Please keep it safe, as you’ll need it for future roles. Consider asking agencies to split your tax-free allowance across jobs if you temp for multiple agencies within a tax year.

Limited tax relief is available on travel costs as an agency temp. Home-to-work travel is generally not deductible, but travel between sites during the working day may qualify for multiple clients obtained through the same agency.

Umbrella Company Workers

Many agencies require you to work through an umbrella company, which employs you and handles your tax, NICs and employment rights. Umbrellas reduce agency administration, but their charges reduce your net pay.

Check what rate the agency is quoting you – the basic temp worker rate or an uplifted umbrella rate covering their extra employment costs. It should be the higher umbrella rate.

Umbrellas previously often paid non-taxable travel expenses, but rules have tightened. Most home-to-work travel costs no longer qualify for tax relief under an umbrella.

Watch for non-compliant umbrella practices like:

• Unlawful loan arrangements instead of pay
• Understating income submitted to HMRC
• Mini umbrella companies abusing tax exemptions
• Paying you as an independent contractor when agency rules make you ’employed’ for tax
• Avoiding paying your full employment rights and minimum wage

Check umbrella compliance carefully. Seek trusted ones via recommendations or approved industry bodies. Your agency may incentivise using certain umbrellas – do more than accept their suggestion, do your research.

Working Through A Limited Company

Some temp agencies or umbrellas require you to work through your limited company, which they contract for services.

Pros of a limited company include:

• Lower taxes on dividends paid to directors/shareholders compared to salary
• No employer NICs for agencies engaging companies rather than workers
• Expenses become tax-deductible business costs

But there are also cons, such as admin hassle and upfront costs. Special tax rules on “IR35” or “off-payroll working” aim to ensure people working like employees through companies pay equivalent taxes.

Under IR35, if your working arrangement would make you an employee of the end client without your company’s existence, extra tax applies when the company pays you dividends that lower your tax burden compared to your salary.

Since 2017, the responsibility for deciding if IR35 applies has moved from your company to public sector clients. Your intermediary employer now deducts tax if the client deems you an effective employee. Similar rules will be applied to large private clients in 2021. This eliminated most tax advantages of small personal services companies for agency workers.

Consider if continuing to operate through a company makes sense if your intermediary employer must now deduct tax before paying you. The admin costs may now outweigh the benefits. Take professional advice on properly closing your company if winding it down.

Key Takeaways

• Know your correct employment status and rights. Seek advice if you need clarification.
• Agencies must operate PAYE on temp workers. Umbrellas are now commonly used intermediaries as well.
• Travel expense tax relief is limited for agency workers and umbrella employees.
• Watch for non-compliant practices by some umbrella companies.
• Off-payroll working rules since 2017 eliminated most tax benefits of limited companies for agency temping.
• Get professional advice on tax and employment rights when working through intermediaries. Understand your obligations.

This summarises the key points on employment status, agencies, umbrella companies and intermediaries. Knowing your proper status and rights is crucial when temporarily working. Seek expert help to avoid tax or legal problems in this complex area. If you need help regarding tax resolution or compliance, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.