To be employed or to be CIS subcontractor – that’s the question

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Exploring the Pros and Cons of Employment vs. Self-Employment in the UK Construction Industry

In the realm of the construction industry, contractors and subcontractors often face the dilemma of whether to operate as self-employed individuals under the Construction Industry Scheme (CIS) or to opt for traditional employment with PAYE (Pay As You Earn) arrangements. Each option comes with its own set of advantages and disadvantages, alongside legal obligations that must be considered. In this blog post, we’ll delve into the key aspects of both employment and self-employment, shedding light on their implications for individuals in the UK.

 

Click on the picture below explaining in video how the calculations work

 

employee or CIS subcontractor
employee or cis subcontract, that’s the question

Employment (PAYE Basis)

Advantages:

  1. Legal Protections: Employees are entitled to various legal protections in the UK, including the right to holidays, statutory pay (such as sick pay, maternity pay, and paternity pay), and the National Minimum Wage (NMW).
  2. Stability: Being employed often provides a sense of stability with a guaranteed income, regular work hours, and potential employee benefits like pension contributions and healthcare.
  3. Reduced Administrative Burden: As an employee, individuals typically have fewer administrative responsibilities compared to being self-employed. The employer handles tax deductions and National Insurance contributions (NICs) on their behalf.

Disadvantages:

  1. Higher Tax and NICs: Employees may have higher tax and NICs deductions compared to self-employed individuals. These deductions are automatically processed through the PAYE system.
  2. Limited Tax Deductions: Unlike self-employed individuals, employees have limited opportunities for tax deductions and expenses, which may result in higher taxable income.

Self-Employment (CIS Subcontractor Basis)

Advantages:

  1. Tax Efficiency: Self-employed individuals often enjoy greater flexibility in managing their taxes. Under CIS, subcontractors have 20% deducted from their payments for tax purposes, potentially resulting in lower overall tax liabilities.
  2. Expense Deductions: Subcontractors can claim expenses related to their business activities, such as equipment, materials, and travel costs, to reduce their taxable income.
  3. Flexibility: Self-employment offers greater flexibility in terms of work schedules and project choices. Subcontractors have the autonomy to choose their clients and negotiate terms.

Disadvantages:

  1. Lack of Job Security: Self-employed individuals may experience fluctuations in workload and income, with periods of unemployment between projects. There’s no guaranteed work or income stability.
  2. No Employee Benefits: Unlike employees, self-employed individuals do not receive benefits such as paid holidays, sick pay, or pension contributions from an employer.
  3. Administrative Responsibilities: Self-employed individuals bear the responsibility of managing their finances, including tax filings, accounting, and record-keeping, which can be time-consuming and require financial literacy.

Tax Liability Comparison:

Let’s consider a scenario where a CIS subcontractor earns £600 gross per week and works 47 weeks with £10,000 in allowable expenses. For comparison, an employee earns the same gross income but works 52 weeks.

For the CIS subcontractor:

  • Gross income: £600/week x 47 weeks = £28,200
  • Allowable expenses: £10,000
  • Taxable income: £28,200 – £10,000 = £18,200
  • Tax liability (assuming basic rate tax of 20%): (£18,200-£12,570) x 20% = £1,126
  • Class 2 NI:  £3.45 x 52 = £179.40
  • Class 4 NI:  £5,630 x 9% = £506.70

For the employee:

  • Gross income: £600/week x 52 weeks = £31,200
  • Taxable income: £31,200
  • Tax liability (assuming basic rate tax of 20%): (£31,200-£12,570) x 20% = £3,726
  • Class 1 NI: (£600-£242) x 12% * 52 = £2,233.92

Conclusion:

Choosing between employment and self-employment in the construction industry involves weighing various factors, including financial considerations, job security, and legal obligations. While self-employment offers greater tax efficiency and flexibility, it comes with increased responsibility and potential income fluctuations. On the other hand, traditional employment provides stability, legal protections, and benefits but may result in higher tax deductions. Ultimately, individuals should carefully evaluate their personal circumstances and preferences before making a decision.

 

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