Put employment income through your company to save tax?

Other income

Let's consider a freelance worker who provides services through a limited company in which he owns all the shares. Like many businesses, times are hard. The part-time second job he’s found will help but the owner wants to put him “on the books” as an employee.

Freelance status?

Our freelancer hopes to persuade the owner of the other business that his employment status is freelance (self-employed) on the assurance that he’ll include the income in his own company’s accounts. He’s asked you for some tips to help his suggestion succeed.

Not a matter of choice

It might be possible for him to agree changes to the terms and conditions of the job to avoid being classed as an employee. Equally it might not. If control of the job is with the business or person he’s working for, he’ll be an employee for tax purposes and the employer must deduct PAYE tax and NI. For example, if the work is as a shop assistant, how and when it’s done will be almost entirely controlled by the business he’s working for.

Time constraints imposed by the nature of the work rather than by the person you’re working for can largely be ignored when considering employment status. For example, a bookkeeper who prepares monthly management accounts must have the work done shortly after the end of each month. This is a deadline imposed by the work and not the person you’re working for. Only if you are able to control how and when you work is there an argument that a job is freelance rather than an employment.

Wages paid to the company

The admin, but not the tax outcome, would be different if our freelancer persuaded the person he’s working for to contract for the work with his company rather him personally. Subject to the trap below, PAYE tax and NI can’t apply to earnings paid to a company because the rules only apply to the earnings of a natural person. The trouble is this doesn’t get him very far. Even if he’s able to contract for the work through his company special rules mean PAYE tax and NI will still apply.

Even if his company contracts for the work the IR35 rules can apply which will result in PAYE tax and NI being payable. IR35 applies if had the contract been direct with the individual his status would be an employee. Since 6 April 2021 if you provide your services through an intermediary to a client and they are a medium-sized or large sector business, it is responsible for deciding if IR35 applies. If the client is “small”, the responsibility for deciding if IR35 applies rests with you.

It doesn’t matter who’s responsible for paying the PAYE tax and NI, there’s no material advantage either way. Only changing the employment status of the job can make a difference.