Whether you are employed or self-employed is not a matter of choice — it is determined by the facts of your working arrangement. Getting this wrong costs money: the wrong NI class, the wrong tax treatment, or an unexpected bill from HMRC. Here is how to determine your status and what it means in 2026/27.
Why Employment Status Matters
| Employed | Self-employed | |
|---|---|---|
| Tax collection | Via PAYE — employer deducts | Self Assessment — you calculate and pay |
| National Insurance | Class 1 (employee + employer) | Class 4 + Class 2 |
| Employment rights | Minimum wage, holiday pay, sick pay | None from clients |
| Expenses | Limited (P87/employment expenses rules) | Broad (wholly and exclusively for trade) |
| Pension | Auto-enrolment by employer | Arrange your own |
| IR35 risk | N/A | Relevant for limited company contractors |
The Three Key Employment Status Tests
HMRC does not use a single test. Status is assessed as a whole, with three factors carrying the most weight:
1. Control
Does the engager control how, when, and where you work?
- Employee signals: set hours, required location, managed processes, told how to do the work
- Self-employed signals: flexibility over working methods, schedule, and location
2. Right of Substitution
Can you send someone else to do the work in your place?
- Employee signal: you personally must do the work; no substitution allowed
- Self-employed signal: you can send a qualified substitute and the client accepts this
3. Mutuality of Obligation
Is the engager obliged to offer work and are you obliged to accept it?
- Employee signal: ongoing obligation both ways; regular guaranteed hours
- Self-employed signal: each project is a separate agreement; no ongoing obligation
Other Supporting Factors
| Factor | Points towards employed | Points towards self-employed |
|---|---|---|
| Equipment | Engager provides tools | Worker provides own tools |
| Financial risk | No risk of loss | Risk of loss on projects |
| Exclusivity | Works only for this engager | Multiple clients |
| Integration | Part of the team structure | Distinct from the team |
| Length | Long-term continuous engagement | Short fixed-term projects |
No single factor is decisive. HMRC looks at the overall picture.
Worked Example: Sarah the Graphic Designer
Sarah works for a marketing agency 4 days a week. The agency:
- Tells her which clients to work on and sets deadlines
- Requires her to be in the office Monday–Thursday
- Provides her computer and software
- Has been her only client for 18 months
- Does not allow her to send a substitute
Despite being paid via invoice and called “freelance” in her contract, HMRC would likely classify Sarah as an employee. The contract wording does not override the facts.
Risk: The agency owes employer NI and may be liable for holiday pay and other employment rights claims. Sarah may be entitled to a NI and income tax refund if she has been overpaying via self-assessment.
National Insurance Comparison 2026/27
| NI class | Who pays | Rate | Earnings band |
|---|---|---|---|
| Class 1 employee | Employee | 8% | £12,570 – £50,270 |
| Class 1 employee | Employee | 2% | Above £50,270 |
| Class 1 employer | Employer | 15% | Above £5,000/year secondary threshold |
| Class 4 self-employed | Self-employed | 6% | £12,570 – £50,270 |
| Class 4 self-employed | Self-employed | 2% | Above £50,270 |
| Class 2 self-employed | Self-employed | £3.45/week | Flat rate |
Self-employed people pay a lower combined NI rate than the employer + employee Class 1 combination — which is one reason HMRC scrutinises self-employment status closely.
Using HMRC’s CEST Tool
The Check Employment Status for Tax (CEST) tool at gov.uk walks through the key questions about a working arrangement and gives a determination. HMRC commits to honour CEST results if the information entered is accurate.
CEST is useful for:
- Contractors assessing their own IR35 status
- Businesses engaging freelancers or contractors
- Anyone uncertain about a new or existing working arrangement
CEST does not give a determination in all cases — some arrangements fall in a grey area. In those cases, professional advice is recommended.
IR35 and Off-Payroll Working
If you operate through a limited company, your employment status for IR35 purposes is separate from your personal tax status. IR35 asks: if you provided your services directly (without the company), would you be an employee?
From April 2021:
- Public sector and medium/large private sector engagers are responsible for determining IR35 status and deducting PAYE/NI if the engagement falls inside IR35
- Small business engagers — the limited company (contractor) self-assesses their status
Inside IR35 means the income from that engagement is taxed as if it were employment income — eliminating most of the tax benefits of operating through a company for that contract.
See our Self Assessment guide, trading allowance guide, and cash in hand tax guide.