What Are the Tax Implications for Employers That Use Sole Traders?
by on November 28, 2023
The freelance sector contributes hugely to UK GDP – in 2022 self-employed people added around £139 billion to the economy – that’s almost 6% of the total. However, employers that use sole traders may fall foul of HMRC’s strict tax rules. Here we look at why, what the implications for employers are and how they can alleviate any issues.
There are 4.24 million self-employed workers in the UK. The most popular sector is construction, with 784,000 self-employed workers, followed by professional, scientific and technical workers (598,000), general services (520,000), and admin and support services (353,000). Other sectors include wholesale, retail and vehicle repairs, healthcare and social work, transport, education, IT, manufacturing and hospitality. For most, being self-employed offers them flexibility and creativity. It enhances their work/life balance but often, by choosing this form of employment, they lose out on employment rights such as paid holidays, pensions and sick pay that ‘traditionally employed’ people enjoy.
Many people find that being a sole trader brings certain advantages such as:
Simple setup – register for Self Assessment, choose a business name, keep records of payments and expenses, and ensure they pay Income Tax and National Insurance
Control over the business – no shareholders means that sole traders have the flexibility of choosing when and where to work
Lower start-up costs – registering is free, and many people find that they incur lower overheads such as accounting costs. Losses in the first years of trading can also be offset against tax.
The issues for employers
Despite the popularity of sole trader status, many employers are reluctant to engage sole traders because of the tax implications that using their services could bring. This is because of the Income Tax (Earnings and Pensions) Act 2003 which could lead to the employer having to deduct PAYE and National Insurance from the sole trader’s invoices if they are deemed to be under the supervision, direction, or control (SDC) of the agency or end-client – we explain more about this here – or if a recruitment agency has found the sole trader the work in the first place.
As in the grey area surrounding IR35 status, if employers use a sole trader who is then deemed to be a disguised employee, they will also be liable for providing full employment rights such as holiday pay, sick pay and pension contributions for the sole trader – something that neither party wants, but a status which may be imposed on them if they both wish the working relationship to continue.
What’s the solution?
Freelance workers are not going away any time soon – their skills continue to be in demand, and their choice to work as sole traders shows no signs of diminishing, thanks to the benefits that the lifestyle brings. However, if employers still wish to use their services, many more sole traders will have to consider alternative employment solutions, such as working through an umbrella company. Payme offers a range of options for sole traders who run the risk of being under the SDC of their clients, and the recruitment agencies who provide them with work.
By partnering with us, sole traders have the stresses and worries of their status determination removed, and employers can alleviate their worries about paying tax, thanks to our specially-developed SDC check, which has been devised in conjunction with some of the leading tax and employment law advisory bodies in the UK to ensure that everyone stays within the law at all times. Of course, sole traders will also benefit from full employment rights, accurate and prompt payments, their income tax and National Insurance contributions taken care of on their behalf, as well as a range of other benefits and rewards.
If you’re a freelance sole trader or you’re an employer and would like to know more about correctly determining a status you can call us on 0333 200 0845, email us at email@example.com, or fill in the contact form here. You can now follow us on X (formerly Twitter) @paymepayroll to keep up with industry news and views, and you can also download our latest guide: Navigating the Storm: Essential Strategies for Choosing the Right Umbrella Company, which is full of information and resources to help you choose the right umbrella company.