The below article was published in Accountancy Today. Original text is available here. Author: John Whelan, CEO of My Digtial.

UK employment is evolving dramatically with one in seven UK workers now working flexible contracts,  a 25% increase over the last two decades. Despite the ongoing pandemic this trend is growing with the latest ONS report revealing a 4% rise in temporary workers despite surging rates of unemployment. 

New era new taxation

We have entered a new era of quantum employment, where work is sliced into minutes and traded across many employers. With work broken down into the smallest possible ‘quanta’, workers’ skills are in demand across industries, reducing their reliance on one employer. 

Quantum employment also boosts businesses who can harness contractors’ skills to remain agile. However, keeping track of the taxes deductible and owed, when the normal working day is split between several workers, quickly becomes complex. HMRC, employers and workers need to know where they stand on tax. 

Income Tax collection harder than ever

Workers holding multiple jobs makes accurately collecting tax difficult for HMRC. For instance, the personal allowance for Income Tax is £12,500. However, when a quantum employee works for multiple employers, each additional job can result in an emergency basic rate tax code being applied (a flat 20% deduction from all earnings).

The application of basic rate emergency tax codes for Income Tax leaves contractors overpaying tax – an issue not easily corrected. Often a tax return at year-end solves overpayments but reduces quantum workers’ income for most of the year. This may encourage another issue, the so-called cash or ‘black’ economy.

A lingering concern in the quantum employment era is the potential for workers operating ‘cash in hand’. A wider variety of employers complicates investigations.  

For instance, a quantum employee may start the day on a construction site and finish working at a bar, both traditionally cash-based operations. Cash-based remuneration for temporary workers places the onus on HMRC to chase workers for Income Tax payment after the work is completed. 

National Insurance at risk

Traditional income tax is not the only levy in jeopardy. The National Insurance (NI) primary threshold allowance of £183, should only be given once per individual. But quantum employees may receive, in error, a NI allowance for each role they work with a different employer. 

Through no fault of their own, quantum workers may unknowingly be liable for additional NI payments leaving a hole in their finances. HMRC once again needs to collect underpayments. 

Collecting tax, either NI or Income Tax at the end of the financial year and delivering a lump sum tax bill to quantum employees leaves workers vulnerable. Without reform to the digital systems underlying taxation, quantum employment means both HMRC and quantum workers face significant additional financial and administrative burdens. Hardly a recipe for more disclosure by the quantum employed.

The value of umbrella companies 

One popular solution to the taxation issues of temporary workers is umbrella companies. Seemingly everyone wins, quantum workers are paid rapidly, employers enjoy flexible workforces and HMRC has ‘one collection source. The reality is less clear cut.

As quantum employment grows, workers will arrive at umbrella companies and professional employment organisations (PEOs) of varying degrees of efficiency and ethical stances. As a result, both tax authorities and employees may experience errors due to inefficiencies, conspiracies, inadvertent errors and/or a lack of ethics. […]

Continue reading in Accountancy Today.