Zero hours contract tax and national insurance

There is no legitimate explanation or definition for a zero-hours agreement in either United Kingdom or Northern Ireland employment law. In common terms, a zero-hours contract is a pact between two parties, typically an employer and an employee, which states – an employee may be asked to carry out a task for an employer but there won’t be any least possible number of work hours. The agreement will offer pay to an employee if he/she completes the work and will deal with the conditions in which work may possibly be turned down. In simple terms, an employer does not have to guarantee a person any work and the same person is not indebted to perform any task offered to him/her. This reflects the basic groundwork of a zero-hours contract, however, the precise structure of zero-hours agreement may vary from company to company. Below mentioned are a few instances:

A person under a zero-hours contract may be employed as a worker or an employee
In certain zero-hours contracts an employee might be obliged to take assignments, if offered, however, in others he/she will not be obliged to do so
Certain zero-hours contracts stop an individual from working for other companies even when the employer does not has any work to offer, however, certain agreements might permit an individual to work at other places
The pay provisions and benefits provided may vary

This essentially means that an employer doesnt have to provide an employee any least possible number of work hours. On the other hand, an employee is not essentially obligated to acknowledge the work offer by an employer

Key points for employers

‘Zero-hours contract’ does not have a precise implication in law
Contracts termed as zero-hours agreements may vary from company to company
Zero-hours workforce may be hired as workers or employees
It is imperative for a company to make sure that written agreements encompass requirements for setting out the rights and responsibilities, status of their zero-hours staff

Employment staff under a Zero-hours contract

There are primarily three chief categories of employment status: Self-employed, worker, and employee. Let’s understand what each means under a Zero-hours contract:

Employee

If there is a compulsion to offer personal service
The employer defines the way in which a particular work is done and timeline of the project
Other factors such as nature and duration of an engagement, reimbursements received by an individual etc.

Worker

An individual is not carrying out a business and the other individual involved is not a customer
There is a compulsion to offer personal service
He/she does not otherwise meet the criteria of being an employee

‘Worker’ is the toughest group to classify. This is for the reason that they exhibit characteristics of both self-employed and employee status. One way to understand is, an individual who would otherwise be self-employed, but shows characteristics of employees. It is imperative to know that all employees are workers

Self-employed

An individual is not carrying out a business and the other individual involved is not a customer
There is a compulsion to offer personal service

Factors to determine, whether a person is carrying out a trade and whether the other company/individual is a client for that business, are listed below:

The employer does not control the working of an individual
The individual is providing specialist services and raises an invoice for the services offered
The person is not included into the employer’s business
The individual supplies the equipment wanted to perform the service
The individual promotes his/her product/service individually
The engagement is comparatively short in duration
The individual is responsible for his/her work and accountable for compliance issues

General categories of rights and protection

Right/protection	Employee	Self-employed	Worker
Adoption leave, statutory maternity, and leave and paid leave	Yes	No	No
Safety and health at the workplace	Yes	Yes	Yes
Itemised payslip	Yes	No	No
National Minimum Wage	Yes	No	Yes
Paid annual leave	Yes	No	Yes
Pension auto-enrolment	Yes	No	Yes
Safety from discrimination at place of work	Yes	Possibly	Yes
Safety from illegitimate deduction from wages	Yes	No	Yes
Safeguard under the transfer of undertakings legislation	Yes	No	Yes
Right not to be unethically laid off (post two years’ service)	Yes	No	No
Entitlement to be complemented at a disciplinary or grievance hearing	Yes	No	Yes
Entitlement to daily and weekly rest breaks	Yes	No	Yes
Entitlement to get written statement of terms and conditions	Yes	No	No
Entitlement to appeal for flexible working	Yes	No	No
Entitlement under data protection legislation	Yes	Yes	Yes
Legal minimum notice	Yes	No	No
Legal redundancy pay (post two years’ service)	Yes	No	No
Statutory Sick Pay	Yes	No	Possibly
Time-off for ante-natal maintenance	Yes	No	No
Time-off for trade union undertakings	Yes	No	No
Unpaid time-off to care for dependent relative	Yes	No	No
Whistleblowing safety	Yes	Possibly	Yes

Rise in Zero-Hours contract

Zero-hours contracts are gaining popularity. In 2005, ~0.1million United Kingdom workers were under a zero-hours contracts, whereas, between Apr-17 and Jun-17 the Office of National Statistics (ONS) recorded 0.9 million United Kingdom workers employed under a contract that does not promise work. The financial crisis in 2007-08 led to an increase in zero-hours contracts as companies were focusing on reducing cost from wherever possible. In the meantime, workers were more accommodating to the contracts as a secured source of income, compared to losing their jobs. This also increased the number of freelancers as people began to become more comfortable working at hours that were more convenient to them. Individuals working under a zero-hours contract usually earn less than other workers, pay a lesser amount of tax and need more in-work benefits

National Insurance

Most workers pay National Insurance contributions (NIC) before receiving their wages and if an employee earns below the threshold limit, he/she will not be required to pay any contributions. For 2018/19, NIC threshold is £162 per week or £702 per month. The genuine amount of Class 1 NIC an individual will pay depends on what he/she earns till the upper earnings limit – this limit for 2018/19, is set at £892 per week or £3,865 per month

For 2018/19, the weekly rates of Class 1 NIC for workers are mentioned below:

On initial £162	Nil
On earnings between £162 and £892	12%
On amount in excess of £892	2%

For 2018/19, the monthly rates of Class 1 NIC for employees are mentioned below:

On initial £702	Nil
On earnings between £702 and £3,865	12%
On amount in excess of £3,865	2%

An employer pays Class 1A NIC if they provide an employee some benefits in kind, for instance, a car for personal use. An employer is liable to pay NIC on the worth of the benefit in kind
An employer pays Class 1B NIC if they have signed a special contract with Her Majestys Revenue and Customs (HMRC) called a PAYE settlement agreement. This is where an employer is liable to deposit income tax due on some reimbursements in kind and expenses payments

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About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.