Income Tax for Self-Employed Contractors Working for One Company

What are the different types of employment status?

Employment status determines an individual’s legal rights and responsibilities at work. It is categorised based on type, employment rights, and criteria for determining status. The table below outlines the details of each type.

What is self-employment?

You will be treated as self-employed for tax purposes if you run your own business and are responsible for operations, income, and expenses. Self-employed people can have one client or many. Working for a single client does not by itself make you an employee, but it is one of the things HMRC looks at.

Examples of self-employed individuals include freelancers, sole traders and contractors.

Can I be employed and self-employed at the same time?

You can be both employed and self-employed at the same time – for example, an employee by day who runs their own business in the evenings. You can also choose to be solely employed, working for a company, or exclusively self-employed, working for yourself.

Here’s a breakdown of the key differences between being employed and self-employed:

Being both employed and self-employed allows you the flexibility to explore different income streams and expand your skill set. Still, it’s essential to understand the responsibilities and legal obligations of each status.

Also related: Work From Home Tax Relief Clarified

Can I be working for someone but on a self-employed basis?

Yes, you can work for someone on a self-employed basis through a contract for service. This means you are providing services as an independent contractor rather than being employed by them. Operate in a service-based profession, such as accounting or consulting. You can offer your skills either as a sole trader, through a limited company, or as part of a Limited Liability Partnership (LLP).

Working this way gives you more control over how you manage your business, including when, where, and for whom you work. However, you are responsible for your taxes, insurance, and compliance with legal obligations.

That insurance is yours to arrange. PolicyBee quotes professional indemnity, public liability and business equipment cover for freelancers and consultants online in minutes.

In what circumstances can an individual’s status be false self-employment?

False self-employment occurs when an individual is classified as self-employed, but their working conditions align more closely with those of an employee. Some employers often use this misclassification to bypass their obligations, such as paying employees’ tax and National Insurance contributions (NICs).

Signs that an individual is falsely classified as self-employed include:

• The individual works exclusively for one company.
• The company dictates work schedules, tasks, and how the work should be performed.
• The individual has limited autonomy over their work or business decisions.

If HMRC investigates and finds that the individual should be classified as an employee, the employer may be required to reclassify the worker correctly. This could result in the employer being held accountable for unpaid taxes and contributions. Sometimes, the employee may also need to address any discrepancies resulting from the misclassification.

What employment rights do I have if I am employed or self-employed?

The main difference between being employed and self-employed lies in rights and responsibilities. Employees have statutory rights such as paid holidays, sick pay, maternity leave, and protection from unfair dismissal. Their employer handles tax deductions and provides a guaranteed income.

On the other hand, self-employed individuals run their businesses, controlling their work schedule and earnings but with no entitlement to paid leave or employer-provided benefits. They are responsible for managing taxes and have fewer legal protections, relying on contracts and health and safety laws for specific rights.

See also: Major UK Employment Law Changes Effective October 2024: What You Need to Know!

How does IR35 apply when working for one company?

Also known as the off-payroll working rules, IR35 makes sure a worker who provides services through their own intermediary pays broadly the same Income Tax and National Insurance as an employee would, where they would have been an employee if they were working for the client directly. It primarily targets freelance contractors working through intermediaries, such as limited or personal service companies, especially those working for one client, who would otherwise be deemed employees if the intermediary didn’t exist.

If a contractor operates through an intermediary but meets the criteria of an employee, IR35 applies, and the contractor is taxed as if they are employed. The rules are not switched off when the client is small. If your client is a small private or voluntary sector business, the client does not have to determine your status – responsibility for deciding whether the rules apply passes to your own intermediary, which means you.

A small client must confirm its size if you ask. A private or voluntary sector client counts as medium or large if it meets two or more of: annual turnover over £10.2 million, balance sheet total over £5.1 million, more than 50 employees – otherwise it is small. The rules are applied contract by contract. Where the client is the one responsible for the decision, it should give you a status determination statement with its reasons. If you are employed by an umbrella company, the off-payroll rules are unlikely to apply.

Find out more: Personal Service Company (PSC) & IR35 Explained!

Does calling my contract ‘outside IR35’ mean I am safe from HMRC?

No. HMRC considers both your written contract and how you actually work for the client. Labelling an engagement ‘outside IR35’ does not settle its tax status if the working arrangements tell a different story. The assessment should reflect the true agreement, including who controls the work and whether you can genuinely send someone else.

Will HMRC accept the result of its CEST employment status checker?

Yes, provided the information entered is accurate and the tool is used according to HMRC guidance. CEST can help check whether the off-payroll rules apply to a particular contract. HMRC says it will stand by a valid result, but you should save a copy and run the check again if your working arrangements materially change.

Does being inside IR35 give me employee rights with my client?

No. Being classed as employed for tax purposes under IR35 does not automatically make you an employee of your client for employment-rights purposes. The off-payroll rules deal with Income Tax and National Insurance, not entitlement to paid holiday, sick pay or unfair dismissal protection. Those rights must be considered separately under employment law.

If I work for an employer and am a self-employed contractor, what is the most tax-efficient way to pay myself?

If you are employed and work as a self-employed contractor, the best way to manage your earnings efficiently for tax purposes depends on how you set up your self-employment. Each business structure has different tax implications, including how income is taxed and reported.

If you operate as a sole trader, your self-employment income is taxed under Income Tax through Self Assessment. In addition, any salary you earn through your employer under PAYE must be declared as you complete a self-assessment tax return. This ensures that HMRC has a complete picture of your total income, which helps calculate the correct tax and National Insurance contributions.

For those who establish a Limited Liability Partnership (LLP), the tax treatment is similar to that of a sole trader. An LLP is treated as a “pass-through” entity, meaning the profits are taxed as personal income rather than at the partnership level.

Setting up a limited company offers additional options for tax efficiency. If that is the route you are weighing up, compare our company formation packages before you decide. You can draw income as a salary, taxed under PAYE, or as dividends, subject to the dividend tax rate. Dividends often provide a more tax-efficient way to withdraw profits from your company, especially if your total income falls below higher tax thresholds. However, if you are an office holder without taking any salary or dividends, you may only need to pay tax if you receive other benefits or payments.

Find out more: UK tax brackets: income tax rates and allowances

How do I pay taxes to HMRC if I am both employed and self-employed?

If you are both employed and self-employed, your taxes are handled as follows:

1. Employment income: Your employer deducts Income Tax and NI through PAYE.
2. Self-employed income: You report your earnings through a Self Assessment tax return and pay any additional Income Tax and NI owed.

Declare your PAYE salary and self-employment income in your Self Assessment to give HMRC a full view of your taxable earnings. You must register for Self Assessment by 5 October after the end of the tax year in which you started – 5 October 2026 for anyone who started in the year to 5 April 2026 – and the online return and the tax are due by 11:59 pm on 31 January after the end of the tax year.