PAYE vs Self-Employed
Last updated: February 2025
Quick Comparison
| Aspect | PAYE (Pay As You Earn) | Self-Employed |
|---|---|---|
| Tax collection | Deducted at source by employer monthly | Paid by the individual via Self Assessment |
| National Insurance | Employee NI plus employer NI at 13.8% | Class 2 (flat rate) and Class 4 (percentage of profits) |
| Expenses | Limited; most costs borne by employer | Broad range of business expenses deductible |
| Rights | Full statutory employment rights | No employment rights; governed by contract terms |
| Administration | Employer handles payroll and reporting | Individual manages all tax affairs |
What Is a PAYE (Pay As You Earn)?
The HMRC system through which employers deduct income tax and National Insurance from employees' wages before payment.
Key Features
- • Tax and NI deducted at source by the employer
- • Employer pays employer NI contributions at 13.8%
- • Employee receives net pay after deductions
- • Real Time Information reported to HMRC each pay period
Best For
- • Employees wanting simplicity and no self-assessment
- • Employers with integrated permanent teams
- • Roles where the worker is under the employer's control
What Is a Self-Employed?
An individual who works for themselves, is responsible for finding their own work, and pays tax through Self Assessment.
Key Features
- • Pays Class 2 and Class 4 National Insurance
- • Files Self Assessment tax return annually
- • Can deduct business expenses from taxable income
- • Responsible for own tax payments including payments on account
Best For
- • Individuals running their own business
- • Freelancers with multiple clients
- • People wanting flexibility and tax planning opportunities
When to Use a PAYE (Pay As You Earn)
PAYE applies when an individual is an employee or a worker engaged under the off-payroll rules. The employer must operate PAYE for anyone whose engagement meets the employment tests.
When to Use a Self-Employed
Self-employed status applies when the individual genuinely operates their own business, controls how they work, can send a substitute, and bears financial risk. They must register with HMRC for Self Assessment.
Which Does Your Business Need?
The correct status depends on the reality of the working relationship, not what the parties choose to call it. HMRC uses tests around control, substitution, and mutuality of obligation. Getting it wrong can result in significant tax liabilities and penalties.
FAQ
Can someone be self-employed for one client and PAYE for another?
Yes. An individual can be self-employed for work they do independently for one client while being an employee under PAYE for another engagement. Each relationship is assessed on its own facts.
What happens if HMRC determines someone should be on PAYE?
The employer may be liable for unpaid PAYE tax, employee and employer NI, plus interest and penalties. Under the off-payroll rules, the fee-payer in the chain is liable for medium and large private sector engagements.
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Get Started FreeThis is guidance for UK businesses, not legal advice. Consult a solicitor for complex matters.
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