Employment Taxes
Employment taxes are a key area of compliance for UK businesses, especially for those employing staff or providing non-cash benefits. We offer specialist advice to help you navigate the more complex aspects of employment taxation.
From understanding your obligations around National Insurance Contributions (NICs) and Income Tax deductions, to advising on benefits in kind, we help you make informed decisions.
We advise on key areas such as:
- National Insurance Contributions (NICs) and Income Tax obligations
- Benefits in kind including company cars, private medical insurance, and share schemes
- Construction Industry Scheme (CIS) compliance for contractors and subcontractors
- IR35 and off-payroll working rules, including status assessments and risk management for personal service companies
- Structuring remuneration for directors and key employees
- HMRC enquiries and dispute resolution
Construction Industry Scheme Compliance
The Construction Industry Scheme (CIS) presents a unique set of challenges for businesses operating in the UK construction sector. Under CIS, contractors are required to deduct tax from payments made to subcontractors and submit these deductions to HMRC. These serve as advance payments toward the subcontractor’s Income Tax and National Insurance contributions.
While many contractors understand that their activities fall within the scope of CIS, navigating the detailed and often changing rules can be complex. Missteps in compliance, such as incorrect deductions, misclassification of workers, or late submissions, can lead to costly penalties and increased scrutiny from HMRC.
Our guidance and support helps you to reduce risk, stay ahead of regulatory changes, and focus on running your business with confidence.
Employed vs Self-Employed workers
Choosing between self-employment and traditional employment comes with its own set of tax-related advantages and challenges. Whether you’re hiring, restructuring, or considering your own status, it’s essential to understand the key difference, especially when it comes to HMRC compliance and financial and tax planning.
Here’s a summary of the key differences:
Tax Implications of Being Self-Employed
- Responsibility for Tax Filing: Self-employed individuals must complete an annual Self-Assessment tax return, reporting income and allowable expenses accurately. Learn more about completing your Self Assessment tax return here.
- Additional Costs for Professional Help: Managing tax affairs independently can be complex, and many self-employed people require support from accountants or advisors—an extra cost that needs to be factored in. We can help with this if you need it.
- Access to Tax Deductions: Self-employed individuals can deduct allowable business expenses, such as travel, equipment, or office space, which can significantly reduce their overall tax liability.
- Earnings Potential: while earnings can be less predictable, self-employed workers often enjoy higher hourly rates and greater flexibility, which can lead to higher overall income depending on business success.
Tax Implications of Being an Employee
- Automatic Tax Deductions: As an employee, taxes are automatically deducted from your salary through the PAYE system, so you don’t have to worry about managing tax payments.
- Additional Employee Benefits: Employees often enjoy benefits such as health insurance, paid leave, company cars, and more, which are not available to self-employed individuals.
- Limited Deductions: As an employee, you cannot deduct business-related expenses or reduce your taxable income in the same way self-employed individuals can, unless very specific reliefs apply such as working from home due to employer requirements.
What is IR35?
IR35 refers to tax legislation designed to ensure that off-payroll workers’ pay the same Income Tax and National Insurance contributions as employees. The rules apply to individuals and organisations involved in off-payroll working arrangements, ensuring that workers are properly classified as either employees or genuinely self-employed.
IR35 Applies to:
- Workers providing services through an intermediary (e.g., a personal service company or PSC) to a client.
- Clients receiving services from workers via an intermediary.
- Agencies or Suppliers that facilitate or provide workers’ services through an intermediary.
- The core aim of IR35 is to prevent tax avoidance by individuals who would otherwise be considered employees but attempt to classify themselves as self-employed to benefit from lower tax rates.
Do IR35 Rules Apply to You?
Determining whether the IR35 rules apply to you can be complex. Generally, if you are working through an umbrella company, IR35 is less likely to apply. However, if you’re working through a personal service company or other intermediary, IR35 is likely to apply depending on your relationship with the client and the nature of your contract.
HMRC has a helpful online tool which will check your employment status.
To properly assess your status under IR35, it’s highly recommended to seek professional advice. Ensuring your contract and working practices are structured correctly can help you avoid potential tax liabilities and penalties.
Why Stratos?
At Stratos, we understand the complexities of tax compliance, whether you’re navigating the intricacies of employment taxes, the Construction Industry Scheme (CIS), or managing self-employment responsibilities. Our expert team is committed to helping businesses and individuals ensure they meet their tax obligations without the stress and confusion.
FAQs
Income Tax rates depend on the salary of the individual. Every taxpayer has a personal allowance of £12,750 which they can earn before they are subject to any Income Tax, unless you earn over £125,140. The different rates of Income Tax are as follows:
- 0% income Tax up to £12,750
- 20% Income Tax from £12,571 to £50,270 (Basic rate)
- 40% Income Tax from £50,271 to £125,1402 (Higher rate)
- 45% Income Tax over £125,140 (Additional rate)
Note that there is a separate rate being introduced for property and savings income.
Contractors are required to file monthly returns regarding the payments made to subcontractors that month via HMRCs online service by the 19th of every month. It must be specified that subcontractors listed are not employees. Penalties for missing these filing deadlines start at £100 and go on to include a percentage of the deductions that should have been on the return. However, note that if a return is not required to be filed and penalties for missing these months can be rescinded upon appeal, but HMRC should be notified.
To register as a contractor, a business must either:
- Pay subcontractors for construction work, or
- Have spent in excess of £3 million on construction in the 12-month period preceding first payment.
To qualify as a subcontractor, you must:
- Undertake construction work for a contractor.
There is a tool on the HMRC website to help you determine whether you fall under the IR35 rules. It is important to determine whether the rules apply to you as they will determine the tax needed to be paid by the deemed employer. If you are deemed to be an employee under the IR35 rules, your deemed employer must deduct Income Tax and National Insurance Contributions from the fees paid to the workers intermediary.
Deciding whether to operate as a sole trader or establish a limited company depends on your profit levels, long-term ambitions, and how you intend to extract income. Sole traders benefit from simplicity and direct access to earnings, with profits taxed as personal income—making this route potentially more tax-efficient when all income is being drawn for personal use. However, as profits increase, this structure can become less efficient.
A limited company offers more flexibility for tax planning, allowing you to extract income through a mix of salary, dividends, and pension contributions, which can result in overall tax savings. It also provides limited liability protection and is often better suited to those planning to grow their business, retain profits for reinvestment, or ultimately sell the company.
As always it is recommended that you take advise before taking advice and at Stratos, we help you assess your goals and financial needs to choose the most efficient and strategic structure for your business.
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Paul Davison
Director
Paul originally qualified as a Chartered Certified Accountant in 1996 and went on to specialise in corporate tax at Ernst & Young and later became a partner at an independent firm of tax advisors.
