Zero hours contract tax and national insurance

Understanding Zero-Hours contract

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

1. ‘Zero-hours contract’ does not have a precise implication in law
2. Contracts termed as zero-hours agreements may vary from company to company
3. Zero-hours workforce may be hired as workers or employees
4. 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

Zero Hours Contracts in the UK

Zero hours contracts have seen significant growth in the UK, especially in the aftermath of the financial crisis. As of recent years, millions of people are working under such agreements. This trend is driven by businesses needing to manage fluctuating demand without committing to permanent contracts.

While some see these contracts as a flexible solution, they have also attracted criticism due to concerns over job insecurity. However, it’s important to note that not all zero-hours contract jobs are exploitative, and many offer opportunities for additional income or flexible working arrangements.

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

An individual will be termed as an employee if the below mentioned conditions are met:

• 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 will be a worker if:

1. An individual is not carrying out a business and the other individual involved is not a customer
2. There is a compulsion to offer personal service
3. 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 will be self-employed if:

• 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:

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

General categories of rights and protection

Rights Under Zero Hours Contracts

If you’re working under a zero-hours contract, your rights depend on whether you are classified as an employee or a worker. Both statuses come with specific protections under UK employment law:

• National Minimum Wage and National Living Wage: You must receive at least the minimum wage for all hours worked.
• Holiday Pay: Workers are entitled to paid holiday based on the hours worked.
• Rest Breaks: Employees on zero-hours contracts are entitled to rest breaks during shifts and between working days.
• Protection from Discrimination: Zero hours contract workers are entitled to protection against discrimination in the workplace.
• Payslips: Employers must provide payslips to all workers, including those on zero-hours contracts.

These rights help ensure that workers are not taken advantage of, even though their hours are not guaranteed.

Can Employers Include Exclusivity Clauses?

An important consideration for workers on zero-hours contracts is whether an employer can include an exclusivity clause. Under UK law, an employer cannot prevent a worker from seeking additional employment elsewhere.

If your zero-hours contract includes such a clause, it may not be enforceable. Workers are legally allowed to work for more than one employer, and any attempt by an employer to stop this could be considered unlawful.

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

Benefits of a zero hour contract

• Benefits of a zero hour contract include flexibility for both employers and employees.
• Employers can adjust staffing levels based on business needs, helping to control costs during fluctuating demand.
• Employees gain freedom to choose when and where to work, allowing them to balance personal commitments or explore other opportunities.
• Zero-hours contracts serve as a stepping stone for individuals to gain experience across industries without the constraints of traditional full-time roles.

What Happens When Your Zero Hours Contract Ends?

A zero-hours contract can either be ongoing or a series of short-term contracts. If your contract ends, your employer must pay you for any outstanding holiday and wages earned, unless you’re on a "rolled-up holiday pay" scheme.

If you’re legally classified as an employee, you may also be entitled to redundancy pay if the contract ends due to redundancy. However, if you’re classified as a worker, redundancy rights do not apply.

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:

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

Other National Insurance Contributions (NICs) such as Class 1A and Class 1B are different from the ones mentioned above:

• 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

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.