Do Self Employed People Pay Less Tax Than PAYE Employees?

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June 1st 2020
Tax Week 9
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Do Self Employed People Pay Less Tax Than PAYE Employees?

For people claiming self employed people 'pay less tax', use this calculator to see the exact difference in taxes and benefits between PAYE and Self Employed.

Recent measures announced to counteract the effects of social isolation on the wages of the UK's population has been limited mainly to employed people on PAYE, with 80 percent of PAYE salaries backed by the government. This has led to pressure on the government by the self employed, freelancers and gig workers to have similar financial assistance. The people in this category are currently limited to welfare amounting to less than £400 per month - a fraction of their usual income.

There seem to be numerous people who argue that the UK's more than four million strong self employed workforce should not receive assistance to the same level as that of PAYE employees. The main reason being touted is, 'self employed people pay less tax'. This is not true, and you can use the calculator below to see for yourself.

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PAYE Employee vs Self Employed
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Self employed people pay the same income tax on their net profits (after wholly and exclusively work-related expenses are deducted). The only difference is the amount of national insurance paid. The thresholds are the same but the initial rate of national insurance is 9 percent, rather than the 12 percent PAYE employee pay. The upper threshold rates are the same at 2 percent for both types of employed. See the 2020-2021 tax rates for yourself.

It is important to note that a self employed person does not receive the same benefit structure as a PAYE employee to fall back on from their NIC payments. Hence the difference in rates. For example, self employed have no paid holiday, sick leave, maternity/paternity leave (limited if Class 2 NIC is paid), work pension and other 'employer funded company' schemes.

A self employed person also must make (if earning over £6,475 in 2020) Class 2 NICs of around £160 a year to top-up their NIC contributions.

A sole trader (self employed person) will not pay employers' national insurance on their own income as this is part of the trading profit. However, a sole trader that hires employees and runs payroll will pay employers' national insurance at the same rates as employers for PAYE employees (13.8 percent).

There are a host of non-tax or income related differences between the self employed and PAYE employees, not limited to the work life balance, job security, dips in income due to trading downturns, insurance requirements and more. Self employed people put up with these downsides to enjoy working on projects they get more authority over and fulfil different sides of maslow's hierarchy of needs.

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