What's the tax status of a second job?
A freelancer's business is struggling but he’s found a second job with another firm. The trouble is his employment status will mean his pay is liable to PAYE tax and NI. Can he divert the income to his company to prevent this?
Other income
An individual, Jim, is a freelance worker who provides services through a limited company in which he owns all the shares. Like many businesses, his has been hit hard by the fallout from coronavirus. 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?
Jim 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 us for some tips to help his suggestion succeed.
Not a matter of choice
It might be possible for Jim 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 a contractor is 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 engager.
Only if the contractor are able to control how and when they 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 Jim 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 Jim 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 Jim’s 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 Jim his status would be an employee. Where IR35 applies to work up to 5 April 2020, JIm’s company would be required to account for the PAYE tax and NI on the earnings. This is also the case for pay for later work if the business Jim works for is “small”. In all other circumstances the payer must deduct PAYE tax and NI before it goes to our Jim’s company.
It doesn’t matter who’s responsible for paying the PAYE tax and NI, there’s no material advantage either way toJim. Only changing the employment status of the job can make a difference.
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