1. The main differences at a glance
| Area | Employed | Self-employed |
|---|---|---|
| Tax collection | Usually deducted through PAYE | Usually settled through Self Assessment |
| National Insurance | Class 1 may apply | Class 4 may apply; Class 2 can be treated as paid |
| Business expenses | Employment expense rules are narrower | Allowable business expenses can reduce taxable profit |
| Holiday pay | Eligible workers can have statutory paid holiday | Genuinely self-employed people do not receive employee holiday pay from clients |
| Workplace pension | Automatic enrolment may apply | You normally arrange your own pension |
| Administration | Usually lower | Records, Self Assessment and possibly MTD |
| Commercial risk | Usually sits mainly with the employer | You normally bear more business risk |
2. Tax and National Insurance
Employees normally have Income Tax and Class 1 National Insurance deducted through PAYE. For most employees in 2026/27, the main Class 1 employee rate is 8% between the primary threshold and upper earnings limit and 2% above the upper earnings limit.
Self-employed sole traders pay Income Tax on taxable business profit. Class 4 National Insurance is normally 6% on profits above £12,570 up to £50,270 and 2% above that. Class 2 is generally treated as paid where profits are at least £7,105.
3. Employment rights, holiday and pensions
Employment can provide rights and benefits that do not appear in a take-home pay figure. Depending on status and eligibility, these can include paid holiday, Statutory Sick Pay, maternity or paternity rights, redundancy rights and access to a workplace pension.
In most automatic enrolment pension schemes, the minimum employer contribution is 3% of qualifying earnings and the total minimum contribution is 8%. Scheme rules can provide more.
Genuinely self-employed people do not normally receive employee holiday pay or Statutory Sick Pay from their clients and are not automatically enrolled by those clients into a workplace pension.
4. Control, independence and business risk
Self-employment usually involves running a business on your own account and bearing more commercial risk. Factors can include who controls the work, whether you can provide a substitute, whether you work for several clients, how you are paid and whether you provide your own equipment.
No single factor automatically decides status. The overall relationship matters. A person can be called a contractor but still be an employee or worker in law.
5. Can you be employed and self-employed at the same time?
Yes. You might have a PAYE job and also freelance or run a separate business. Class 1 National Insurance can apply to your employment and Class 4 National Insurance can apply to self-employed profits.
You may need a Self Assessment return for the self-employed income. If your gross trading income is more than £1,000, check the registration rules and any exceptions that apply.
6. What about a limited company?
Running a limited company is different from being self-employed as a sole trader. A company is a separate legal entity. The company can pay Corporation Tax and may pay you through salary, dividends or other permitted routes.
A limited company can make sense for commercial, liability, funding or growth reasons, but it is not automatically better for tax. It also brings more accounting, Companies House and payroll considerations.
Use Experlu's custom quote route for a tailored scope.
Frequently asked questions
Can I choose whether I am employed or self-employed?
Not simply by choosing a label. Employment status depends on the real contractual and working arrangements. HMRC provides the CEST tool for tax status.
Can I be employed in one job and self-employed in another?
Yes. It is possible to be employed in one role and self-employed in another at the same time. The tax and National Insurance treatment can apply separately to each source.
Does self-employed always mean contractor?
No. A contractor can be self-employed, a worker or an employee depending on the arrangement. The contract label is only part of the picture.
Who gets paid holiday?
Almost all workers except those who are genuinely self-employed are legally entitled to statutory paid holiday, subject to the detailed rules.
Can self-employed people get Statutory Sick Pay?
Genuinely self-employed people are not eligible for Statutory Sick Pay from a client. Other support may be available depending on circumstances.
Which route is better for tax?
There is no universal answer. Compare the actual tax and National Insurance result, then consider expenses, benefits, pension contributions, security, flexibility and admin.
Speak to a UK-based tax advisor about your specific circumstances before you commit to a route.
This guide is general information. Employment status can differ for tax and employment-rights purposes, and the correct treatment depends on the actual working arrangement.