Contracting vs Employment: Understanding the Key Differences in the UK

For overseas companies expanding into the UK, understanding employment law is essential to ensure compliance and to avoid potential legal pitfalls. One of the most important distinctions businesses must grasp is the difference between hiring employees and engaging contractors. Each option has its own legal, tax and HR implications and getting it wrong can result in financial penalties and potentially damage to your reputation.

Here are our tips for navigating UK employment rules and making the best-informed decisions when structuring your UK workforce.

What is an Employee? 

An employee in the UK is someone who works under a contract of employment, which sets out their rights and responsibilities. Employment contracts typically specify details such as salary, working hours, holiday entitlement and notice periods.

Key characteristics of employment: 

• Control: The employer determines how, when and where the work is performed.
• Mutual obligation: The employer is required to provide work, and the employee must accept it.
• Integration: The employee is part of the organisation, often using company resources and working under its policies.
• Tax and Benefits: Employers must deduct income tax and National Insurance (NI) contributions from an employee’s salary and provide statutory benefits such as holiday pay, sick pay and pension contributions.

What is a Contractor? 

A contractor (often referred to as a self-employed individual or freelancer) provides services under a contract for services rather than a contract of employment. Contractors are not considered employees, and their working arrangements are generally more flexible.

Key Characteristics of Contracting: 

• Control: Contractors have more autonomy over how they complete their work.
• No mutual obligation: The company is not obliged to offer work, and the contractor is not obliged to accept it.
• Financial responsibility: Contractors manage their own tax and National Insurance through the self-assessment system.
• No employee benefits: Contractors are not entitled to holiday pay, sick pay or employer pension contributions.

The difference between employees and contractors centres around tax liabilities, legal obligations and business operations. The UK government has strict rules to prevent businesses from misclassifying employees as contractors to avoid tax and employment obligations.

Understanding the UK’s Anti-Avoidance Rules: IR35 

IR35 is a set of tax regulations designed to identify cases where contractors are effectively working as employees but through an intermediary, such as their own limited company. If HMRC determines that a contractor is working in a way that resembles employment, the company engaging them may be liable for additional tax and National Insurance contributions.

For overseas companies hiring contractors in the UK, it’s important to conduct an IR35 assessment to determine whether the contractor should be taxed as an employee.

Which Option is Right for Your UK Expansion? 

For businesses setting up in the UK, choosing between employees and contractors depends on factors such as long-term business goals, budget and the level of control required over the workforce.

How Paul Beare can Help 

At Paul Beare Ltd, we support overseas companies navigating the complexities of UK employment and contracting. From advising on legal structures to managing payroll and compliance, we ensure that your UK expansion is seamless and fully compliant with UK regulations.

If you need guidance on hiring employees or contractors in the UK, then please get in touch with us today.