How Do I Know if Someone Counts as Self-Employed or Should Be on PAYE?

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How Do I Know if Someone Counts as Self-Employed or Should Be on PAYE?

Oct 26, 2025 | Blog

When running a construction firm, deciding whether a worker is self-employed or should be on PAYE isn’t just paperwork — it’s financial risk management.
Here’s how to tell the difference and protect your margins, cashflow, and compliance.

What’s the Difference Between Self-Employed and PAYE in Construction?

In short:
A genuinely self-employed person runs their own business and controls how, when, and where they work. A PAYE employee works under your control, using your tools, on your schedule.

The Key Test: Control, Substitution, and Mutuality of Obligation

HMRC focuses on three main factors:

Control – Who decides how and when the work is done?
If you direct the worker daily, they’re likely an employee.
Substitution – Can they send someone else to do the work?
Self-employed subcontractors usually can.
Mutuality of Obligation – Are you obliged to offer work, and are they obliged to accept?
A yes on both sides suggests employment.

For example:

A bricklayer who brings their own labourer, sets their hours, and invoices you per job is self-employed.
A site labourer who turns up daily, follows your foreman’s direction, and gets paid weekly is likely PAYE.

Why Does It Matter?

1. HMRC Penalties and Backdated Liabilities

If HMRC decides someone should have been on PAYE, you could owe:

Income Tax and National Insurance (backdated up to 6 years)
Penalties and interest
Employer NIC contributions not originally budgeted for

That can easily run into tens of thousands of pounds for medium-sized construction firms.

2. Cashflow and Margin Distortion

Many firms think they’re saving on PAYE costs by using self-employed workers — but if the classification is wrong, it distorts true margins.
This leads to underpricing jobs and sudden shocks when reclassification happens.

At Thomas Emlyn Ltd, we often find that firms paying “subbies” weekly without checking employment status lose 5–10% in real margin once corrected for taxes and liabilities.

How to Check Worker Status Correctly

Step 1: Use HMRC’s CEST Tool

HMRC’s Check Employment Status for Tax (CEST) tool helps determine status.
It asks about:

Control over work
Equipment provided
Substitution rights
Financial risk and opportunity for profit

👉 Access CEST on GOV.UK

⚠️ Tip: CEST’s outcome is only reliable if answers are accurate and documented. Many construction directors rush through it — that’s risky.

Step 2: Keep Evidence

Keep records showing:

Signed contracts with substitution clauses
Proof the worker has insurance and other clients
Invoices (not payslips)
Their own UTR and CIS registration

This demonstrates genuine self-employment if questioned.

Step 3: Review Regularly

A subcontractor can shift from self-employed to employee over time.
Example:

A long-term carpenter who’s worked full-time on your sites for two years, under your tools and supervision, might now meet the PAYE test — even if they started self-employed.

Review status every 6–12 months as projects and relationships evolve.

How CIS Fits Into This

The Construction Industry Scheme (CIS) allows contractors to deduct tax at source from self-employed subcontractors’ payments.
But CIS does not determine employment status — it’s just a tax collection mechanism.

In other words:

Being registered for CIS doesn’t automatically mean someone is self-employed.

That’s one of the most common misconceptions we see when auditing client books at Thomas Emlyn Ltd.

How to Decide: A Quick Comparison Table

Factor	Self-Employed	PAYE Employee
Works for multiple clients	✅	❌
Provides own tools/equipment	✅	❌
Can send substitute	✅	❌
Paid by invoice	✅	❌
Paid through payroll	❌	✅
Subject to company supervision	❌	✅
Entitled to holiday/sick pay	❌	✅

If most answers fall in the right-hand column — your worker probably belongs on PAYE.

How Thomas Emlyn Ltd Helps Construction Firms Stay Compliant

Our Virtual Finance Office (VFO) service gives construction directors full visibility on:

CIS vs PAYE classifications
Payroll compliance and real-time HMRC reporting
Margin analysis by worker type
Cashflow impact of PAYE onboarding
Forecasting for upcoming tax liabilities

For growing firms, our Virtual Finance Director (VFD) service goes deeper — modelling labour costs, pricing, and workforce structure to maximise profit per project.

Example:
A roofing firm with 14 subcontractors found that moving 5 long-term workers to PAYE reduced risk exposure by £38,000 and improved quote accuracy by 9% in three months.

Why Clarity on Employment Status Builds Stronger Margins

Accurate Pricing: You can quote with confidence when labour costs reflect true employment status.
Smoother Cashflow: No surprise liabilities from HMRC.
Simpler Admin: Automated payroll and CIS systems integrated via Xero or QuickBooks.
Stronger Growth: Clean books attract funding, partnerships, and higher-value contracts.

This clarity is what allows construction firms working with Thomas Emlyn Ltd to scale with confidence — not confusion.

FAQs: Self-Employed vs PAYE in Construction

1. What happens if I get it wrong?

HMRC can demand backdated tax, interest, and penalties for up to six years.
Directors are personally responsible for ensuring employment status checks are accurate. We’ve seen firms fined over £25,000 for repeated misclassification.

2. Can I pay someone both CIS and PAYE?

Yes — but not for the same work.
If a worker does site-based work under CIS but also undertakes PAYE-style duties (like supervision or admin), separate contracts and payrolls must be maintained.

3. What’s the difference between IR35 and CIS?

IR35 applies mainly to limited company contractors, testing if they’d be employees without their company.
CIS applies to sole traders and partnerships in construction. The principles overlap — both assess employment status — but the legislation differs.

4. How often should I review my subcontractors’ status?

Every 6–12 months or when project scope changes. A self-employed subcontractor who’s been with you for years may drift into PAYE territory unintentionally.