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Taxation (UK) · Income from employment

Employment vs Self-Employment Status for ACCA TX-UK

Updated 11 October 2026 · Fact-checked

Employment status decides whether someone is taxed as an employee (employment income, PAYE, Class 1 NIC) or as self-employed (trading income, self-assessment, Class 4 NIC). There is no single statutory test. You weigh the badges of employment, such as control, substitution, mutuality of obligation, equipment and risk, and reach an overall conclusion.

Understand Employment vs Self-Employment Status

Every worker is either an employee or self-employed. The label matters because the tax rules differ a lot. An employee is taxed on employment income and the employer deducts tax through PAYE. A self-employed person is taxed on trading profits and files a self-assessment return.

The law gives no single definition. Courts and HMRC look at the whole relationship and weigh several factors, often called the badges of employment. No one badge decides the case. You must look at the facts, judge each one, and then give an overall conclusion.

The main badges are:

  • Control: an employee is told what to do, when and how. A self-employed person decides for themselves.
  • Substitution: an employee must do the work personally. A self-employed person can usually send someone else.
  • Mutuality of obligation: the employer must offer work and the worker must accept it. Self-employed people can usually turn work down, and the client has no duty to offer more.
  • Equipment: employees use the employer's tools. Self-employed people supply their own.
  • Financial risk: self-employed people carry the risk of loss, may bear their own costs and expect to make a profit or loss. Employees are paid regardless.
  • Integration: an employee is part of the organisation. A self-employed person runs their own business and has several clients.
  • Other terms: fixed hours, holiday pay, sick pay, a pension and a written contract point to employment. Having a contract that says self-employed does not settle the matter. The real working arrangement counts.

The tax consequences follow from the conclusion. Employees pay Class 1 NIC and the employer pays Class 1 NIC and Class 1A on benefits. The self-employed pay Class 4 NIC (and Class 2 where relevant) and can usually deduct a wider range of expenses, but face payments on account.

Key rules to remember

Class 1 employee NIC
Nil on £1 – £12,570; 8% on £12,571 – £50,270; 2% above £50,270 (per year)
Applies to employees, deducted through payroll.
Class 1 employer NIC
Nil on first £5,000; 15% above £5,000 (per year)
Employer cost only arises if the worker is an employee. Employment allowance is £10,500, subject to eligibility.
Class 4 NIC
Nil on £1 – £12,570; 6% on £12,571 – £50,270; 2% above £50,270
Paid by the self-employed on trading profits, with no employer NIC.
Class 1A NIC
15% of taxable benefits
Paid by the employer only. It arises on benefits given to employees.
Status decision
Weigh all badges: control, substitution, mutuality of obligation, equipment, risk, integration, other terms
No single badge is decisive. State the conclusion and give reasons.

How to solve Employment vs Self-Employment Status questions

Use this method for any status question, whether a short objective test or a written scenario.

  1. 1Read the facts and list each one against a badge: control, substitution, mutuality of obligation, equipment, risk and integration.
  2. 2For each badge, say whether it points to employment or self-employment.
  3. 3Ignore the label in the contract if the facts of the working relationship say otherwise.
  4. 4Weigh the points and state a clear overall conclusion. Do not sit on the fence.
  5. 5State the tax consequences of that conclusion: employment income and PAYE, or trading income and self-assessment.
  6. 6Cover NIC: Class 1 employee and employer, or Class 4 (and Class 2 if asked).
  7. 7If numbers are given, calculate the NIC or the tax using the rates provided.
  8. 8Check your answer addresses the exact question, such as advice for the worker or for the payer.

Quickest way: Badge scoring under time pressure

When to use it: Use it in objective test questions and in short written parts where you have about two minutes per mark.

  1. Underline each fact in the scenario and write E or S beside it.
  2. Count the E and S marks, but give more weight to control, substitution and mutuality.
  3. Pick the side with the stronger points and write the conclusion first.
  4. Give one sentence of reasoning per badge, then the tax effect.
  5. For OT questions, eliminate options that rely on a single badge or on the contract label alone.

Common mistakes in Employment vs Self-Employment Status

  • Deciding status from one badge only, such as the contract label.

    Students want a simple test and a single badge feels clear.

    Fix: Weigh all badges and say the real working arrangement matters more than what the contract calls it.

  • Giving a list of badges without a conclusion.

    Students run out of time or fear being wrong.

    Fix: Always finish with a clear sentence such as 'On balance Sam is self-employed' and justify it.

  • Treating the right to send a substitute as a sign of employment.

    Students mix up who has the right.

    Fix: A real right to send someone else points to self-employment. A duty to work personally points to employment.

  • Forgetting the NIC consequences.

    Students stop at income tax.

    Fix: Add Class 1 employee and employer NIC for employees, and Class 4 for the self-employed.

  • Mixing up the employer-only classes.

    Class 1, 1A and 4 are learned separately.

    Fix: Remember that employers pay Class 1 and Class 1A. The self-employed pay Class 4 only on their own profits.

  • Ignoring the facts that point both ways.

    Students pick the facts that fit their first idea.

    Fix: Acknowledge the mixed signals, then explain which ones carry more weight.

Worked examples

Example 1

Priya works for a company three days a week. The company sets her hours, provides her laptop, pays her a fixed monthly sum including holiday pay, and she must do the work herself. Advise whether she is employed or self-employed and state the tax consequences.

Show the solution
  1. Control: the company sets her hours, which points to employment.
  2. Substitution: she must work personally, which points to employment.
  3. Equipment: the company provides the laptop, which points to employment.
  4. Risk and pay: a fixed monthly sum with holiday pay means she bears no financial risk, which points to employment.
  5. Overall, every badge points the same way, so she is an employee.
  6. Tax: she is taxed on employment income through PAYE. She pays Class 1 employee NIC and the company pays Class 1 employer NIC.

Answer: Priya is an employee. She is taxed under PAYE on employment income, and Class 1 NIC applies to her and to the company.

Example 2

Tom, a self-employed designer, has annual trading profits of £62,270. Compute his Class 4 NIC and compare it with Class 1 employee NIC if he earned the same amount as an employee. Ignore Class 2.

Show the solution
  1. Class 4: £12,571 to £50,270 is £37,700 of profit, taxed at 6%. 37,700 × 6% = £2,262.
  2. Profit above £50,270 is £62,270 − £50,270 = £12,000, taxed at 2%. 12,000 × 2% = £240.
  3. Total Class 4 = £2,262 + £240 = £2,502.
  4. Class 1 employee: the same bands apply, but at 8% on the middle band. 37,700 × 8% = £3,016.
  5. Above £50,270 the rate is 2%, so £240.
  6. Total Class 1 employee = £3,016 + £240 = £3,256.
  7. Difference = £3,256 − £2,502 = £754. An employee would also trigger employer Class 1 NIC at 15% above £5,000.

Answer: Tom's Class 4 NIC is £2,502. Class 1 employee NIC on the same amount would be £3,256, which is £754 more, before employer NIC.

Exam tips

  • Always give a conclusion on status. A list of badges alone loses marks.
  • Quote the facts from the scenario next to each badge. Marks are for application, not definitions.
  • Never rely on the contract label alone. Say the actual working practice counts.
  • Learn the NIC rates by class so you can calculate quickly if the question asks for it.
  • In objective tests, watch for options that treat one badge as decisive. They are usually wrong.

Practice questions from Income from employment

Employment vs Self-Employment Status in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Employment vs Self-Employment Status: frequently asked questions

Is there one test for employment status?

No. You weigh several badges together, such as control, substitution, mutuality of obligation, equipment and risk. You then give an overall conclusion based on the facts.

Does a contract saying someone is self-employed settle the matter?

No. The actual working arrangement matters more than the label. If the facts point to employment, the worker is treated as an employee.

What are the tax consequences of being an employee?

The employee is taxed on employment income through PAYE and pays Class 1 NIC. The employer also pays Class 1 NIC and Class 1A on taxable benefits.

What NIC does a self-employed person pay?

They pay Class 4 NIC on trading profits at 6% between £12,571 and £50,270 and 2% above. They pay no employer NIC and the person engaging them has no PAYE duty.