Who are “employees” for payroll purposes?

Employers are required by law to deduct, through the payroll, income tax under PAYE and Class 1 National Insurance contributions (NICs) from the earnings of “employees”, and to calculate and pay employer’s NICs as a percentage of each employee’s earnings. It is, therefore, essential that employers correctly identify all of their “employees”. (See I am self-employed. Why does my client insist on putting me on the payroll?)

According to tax legislation, an employee is:

• a person who works under a contract of service,
• a person who works under a contract of apprenticeship, or
• a civil servant.

In addition, the tax legislation requires some other persons to be treated as employees for PAYE purposes, i.e.

• office holders, such as directors and company secretaries (See I am a company director. Am I an “employee” or a “worker”?)
• agency workers, i.e. persons supplied to clients by recruitment agencies (See I find work through a recruitment agency. Am I an “employee” or a “worker”?)
• workers supplied to work for a client by an intermediary that is a managed service company, i.e. where the workers are supplied by a company or partnership that is controlled by a “scheme provider”. (See My company is a managed service company. Am I an “employee” or a “worker”?)
• workers supplied, in certain circumstances, to work for a client by an intermediary that is a personal service company, i.e. where the workers are supplied by their own limited companies or partnerships, (commonly known as “IR35 workers”). (See I am subject to IR35 rules. Am I an “employee” or a “worker”?)