Whether you are employed or self-employed makes a substantial difference to how you are taxed and the income tax liabilities of an employed person can be very different from those of a self-employed person with similar levels of gross income. The National Insurance liabilities of the employed and self-employed are also calculated differently and entitlement to benefits, such as Jobseeker’s Allowance, also varies depending on one’s employment status.
It is therefore important for any working person to know their exact employment status. Sometimes, however, deciding whether someone is genuinely self-employed or an employee can be difficult and HM Revenue and Customs are unforgiving of those who ‘get it wrong’. However, they do produce fact sheets to help people make the correct decision.
Guidance from HMRC on the related tax issues can be found here
It is quite possible to set up a 'self-employed' relationship which is caught by the rules and will be treated by HMRC as an employer/employee relationship. The cost to the employer of having such a relationship 'redefined' as one of employment can be massive, so it is essential to make sure that any such arrangements are watertight. There is a special regime dealt with under IR35 which will bring some payments made to limited companies into the PAYE regime.
In 2014 regulations were brought in to bring more contractors into PAYE to prevent the use of 'false self-employment' intermediaries, which typically involved schemes using an 'umbrella company' or an offshire company.