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Our workforce compliance guide to the United Kingdom covers everything you need to compliantly hire, onboard, manage and pay independent contractors and employees in the UK.
Worksuite offers a whole range of professional services and compliance tools, making it easy to compliantly engage independent contractors in the United Kingdom.
We work with the best legal partners in the United Kingdom to create contract templates that are compliant with local laws to protect you and your contractors from fines and penalties.
Our bespoke onboarding workflows and screening questioners will help you determine the worker status in compliance with the UK law, based on which you can decide to engage a worker as a contractor or full-time worker—all without needing to set up your business entity.
Any business hiring in the UK should understand the important legal distinction between who classifies as an independent contractor and who can be hired as an employee. Fines or penalties may be issued to businesses hiring contractors under the guise of employment.
Understanding the distinctions between employees and independent contractors (or self-employed workers) is critical to compliantly engaging workers in the UK. It is essential to work with a partner like Worksuite to ensure you put in place an engagement framework that accurately classifies freelancers as independent contractors for you and lets you know when freelance talent must be engaged as a payrolled contractor or employed directly.
In the UK there are multiple sources of employment law that cover both employees and independent contractors. UK employment law may also vary slightly between its four geographical zones of Great Britain (England, Scotland, Wales) and Northern Ireland.
In Great Britain (England, Scotland, Wales), this is governed by the Westminster Government in England through the Department for Work and Pension (DWP), along with various employment laws within Acts of Parliament (such as the Employment Rights Act 1996, the National Minimum Wage Act 1998, and the Working Time Regulations 1998), regulations, common law, and case law. In Northern Ireland, employment law is governed by the Northern Ireland Assembly, although there is significant alignment with British employment law.
Independent contractors are not defined in UK law, and so there is a reliance upon case law (precedence).
The individual must submit their CV (or resumé) to the employer, and some employers will also ask the individual to provide references. Once a decision has been made, the employer must deliver a formal job offer in writing to the individual. Once the individual has been offered and has accepted the job, the employer must acquire the individual’s personal information such as date of birth, proof of right to work in the UK, national identification (e.g. passport), proof of address, national insurance number, and most recent P45 (see below)
Contractors can be hired directly or via an intermediary, such as a staffing agency or umbrella company. Contractors may be found via word-of-mouth, jobs boards, social networks, industry bodies, or other forums. Although the hiring practices vary, the contractor may be asked to provide a CV, portfolio, and references, and possibly sign an NDA.
The key contractor operating models are:
Employees receive a P60 form from their employer at the end of each tax year (6 April to 5 April), and a P45 form upon termination of employment.
Employees are not required to submit any tax forms in relation to their income earned via employment. However, they will need to include some details from these forms as part of any tax self-assessments for additional self-employed work.
Tax codes and national insurance (NI) numbers are issued by Her Majesty’s Revenue and Customs (HMRC)
Contractors who do not operate via an intermediary must file their own tax returns by registering for HMRC’s Self-Assessment process. They may also need to register for Value Added Tax (VAT)
Employers must obtain new employees’ most recent P45 form. If the employee does not have a P45 form available, employers can use HMRC’s New Starter Checklist form.
Employers are required to withhold employees’ tax and national insurance at time of payment to the employee. This occurs through the PAYE payroll scheme. Employers report end-of-year expenses paid to each employee via a P11D form or using HMRC’s PAYE Online service.
Employers must give all employees a P60 form at the end of the tax year. Most businesses generate these forms using payroll software. Alternatively, HMRC’s Basic PAYE Tools can be used to generate the forms.
Hiring companies do not withhold any of the contractor’s payment for tax purposes
Upon termination of employment, the employer must issue the employee with a P45 form, which shows how much tax the employee has paid in the current tax year (6 April to 5 April). Employees must issue a P45 by law.
Changes to the IR35 tax law (April 2021) place more responsibilities on hiring companies to determine the contractor’s employment status before hiring them. This can be done using HMRC’s Check Employment Status for Tax (CEST) tool.
Employees are paid on an hourly, weekly, or monthly basis.
Contractors operating as a business typically submit an invoice on a monthly basis. Contractors operating without a business (i.e., as a sole-trader) may be paid via any preferred method, and often require a payment receipt.
The hiring company and contractor may also negotiate a payment structure, including any up-front payment, partial payments, and a final payment upon completion of the work.
Employment rights include National Minimum Wage (NMW), Statutory Sick Pay, Statutory Redundancy Pay, maternity/paternity pay and leave, parental pay and leave, notice periods, flexible working, emergency time off work, rest breaks and nights off, maximum hours per week (unless the employee opts out), automatic enrolment in a pension scheme, request for flexible working, minimum notice period of dismissal, statutory redundancy pay.
Contractors do not have standard employees’ rights. However, they have rights regarding health and safety, and protection against unfair discrimination.
The employer pays all employee benefits.
Contractors’ benefits are governed by the content of the contract.
Employees are usually paid in arrears on or before the last day of the month for which payment is due
Contractors send an invoice (or other form of payment request), and typically require payment within 14 days or 28 days of submission, unless otherwise stipulated in the contract. Contractors are not paid by payroll in most cases.
In Great Britain (England, Scotland, Wales), this is governed by the Westminster Government in England through the Department for Work and Pension (DWP), along with various employment laws within Acts of Parliament (such as the Employment Rights Act 1996, the National Minimum Wage Act 1998, and the Working Time Regulations 1998), regulations, common law, and case law. In Northern Ireland, employment law is governed by the Northern Ireland Assembly, although there is significant alignment with British employment law.
The individual must submit their CV (or resumé) to the employer, and some employers will also ask the individual to provide references. Once a decision has been made, the employer must deliver a formal job offer in writing to the individual. Once the individual has been offered and has accepted the job, the employer must acquire the individual’s personal information such as date of birth, proof of right to work in the UK, national identification (e.g. passport), proof of address, national insurance number, and most recent P45 (see below)
Employees receive a P60 form from their employer at the end of each tax year (6 April to 5 April), and a P45 form upon termination of employment.
Employees are not required to submit any tax forms in relation to their income earned via employment. However, they will need to include some details from these forms as part of any tax self-assessments for additional self-employed work.
Tax codes and national insurance (NI) numbers are issued by Her Majesty’s Revenue and Customs (HMRC)
Employers must obtain new employees’ most recent P45 form. If the employee does not have a P45 form available, employers can use HMRC’s New Starter Checklist form.
Employers are required to withhold employees’ tax and national insurance at time of payment to the employee. This occurs through the PAYE payroll scheme. Employers report end-of-year expenses paid to each employee via a P11D form or using HMRC’s PAYE Online service.
Employers must give all employees a P60 form at the end of the tax year. Most businesses generate these forms using payroll software. Alternatively, HMRC’s Basic PAYE Tools can be used to generate the forms.
Upon termination of employment, the employer must issue the employee with a P45 form, which shows how much tax the employee has paid in the current tax year (6 April to 5 April). Employees must issue a P45 by law.
Employees are paid on an hourly, weekly, or monthly basis.
Employment rights include National Minimum Wage (NMW), Statutory Sick Pay, Statutory Redundancy Pay, maternity/paternity pay and leave, parental pay and leave, notice periods, flexible working, emergency time off work, rest breaks and nights off, maximum hours per week (unless the employee opts out), automatic enrolment in a pension scheme, request for flexible working, minimum notice period of dismissal, statutory redundancy pay.
The employer pays all employee benefits.
Employees are usually paid in arrears on or before the last day of the month for which payment is due
Independent contractors are not defined in UK law, and so there is a reliance upon case law (precedence).
Contractors can be hired directly or via an intermediary, such as a staffing agency or umbrella company. Contractors may be found via word-of-mouth, jobs boards, social networks, industry bodies, or other forums. Although the hiring practices vary, the contractor may be asked to provide a CV, portfolio, and references, and possibly sign an NDA.
The key contractor operating models are:
Contractors who do not operate via an intermediary must file their own tax returns by registering for HMRC’s Self-Assessment process. They may also need to register for Value Added Tax (VAT)
Hiring companies do not withhold any of the contractor’s payment for tax purposes
Changes to the IR35 tax law (April 2021) place more responsibilities on hiring companies to determine the contractor’s employment status before hiring them. This can be done using HMRC’s Check Employment Status for Tax (CEST) tool.
Contractors operating as a business typically submit an invoice on a monthly basis. Contractors operating without a business (i.e., as a sole-trader) may be paid via any preferred method, and often require a payment receipt.
The hiring company and contractor may also negotiate a payment structure, including any up-front payment, partial payments, and a final payment upon completion of the work.
Contractors do not have standard employees’ rights. However, they have rights regarding health and safety, and protection against unfair discrimination.
Contractors’ benefits are governed by the content of the contract.
Contractors send an invoice (or other form of payment request), and typically require payment within 14 days or 28 days of submission, unless otherwise stipulated in the contract. Contractors are not paid by payroll in most cases.
Self-employment as an independent contractor is a popular income model for many individuals. The Covid pandemic has prompted an even greater increase in UK individuals working as self-employed independent contractors.
UK labor law distinguishes between three types of employment status classification: employee, independent contractor (or self-employed), and worker. Depending on the individual’s classification, this can have significant implications for companies looking to hire contractors in the UK. For the hiring company, engaging with independent contractors may be legally and financially risky, especially given the possibility of an independent contractor becoming re-classified as an employee of the hiring company.
This risk has been heightened since the UK updated the Off-Payroll Working (IR35) rules in 2021. Hiring companies should ensure their contract templates fully align with IR35, so that the individual’s status as a contractor is clear.
If the real substance of the company-contractor relationship proves to effectively be an employment relationship, the hiring company may suffer legal and financial penalties (including payroll taxes). It is therefore important to leverage an employment service partner like Worksuite when hiring in the UK, in order to ensure that independent contractors fall under the correct working relationship with your business.
In the UK, an individual is classified as an independent contractor or an employee based on the reality of the relationship between the individual and the hiring company. There is no single body of law in the UK that specifies this distinction. Instead, multiple factors are considered. Individuals are generally considered to be independent contractors if they:
Sole traders and PSCs: In the UK, independent contractors typically either operate as a self-employed “sole trader” or they create a “personal services company” (PSC) such as a limited liability partnership (LLP) or public limited company (PLC). For companies looking to hire an independent contractor, hiring an individual who is working as a “sole trader” can be risky, as it is possible the relationship may become an employer-employee relationship, which places additional financial and legal obligations on the employer. Instead, it can be less risky to work with an individual who is operating as a PSC.
IR35 rules (named after an Inland Revenue (IR) press release from 1999) were introduced to prevent contractors from working “off payroll” as a way of avoiding tax and national insurance contributions. IR35 tries to ensure that when contractors are effectively working in the same manner as employees, those contractors pay the same national insurance and income tax contributions as employees.
IR35 rules apply when a contractor provides services to a client via an ‘intermediary’, such as their own company, a partnership, or a personal service company (PSC). The IR35 rules were originally introduced in April 2000, but changes in April 2021 placed greater responsibility on medium and large-sized companies (along with public sector organisations) to assess the contractor’s employment status.
There are several aspects of IR35 that are worth noting:
‘Inside’ vs ‘Outside’ IR35: A contractor can be ‘inside’ or ‘outside’ IR35. Being ‘inside’ IR35 means the contractor is working within the remit of the powers of IR35. In short, the contractor is subject to the same income tax and national insurance contributions as if they were an employee. If a contractor is assessed as being ‘inside’ IR35, they may also be able to benefit from employee rights. Being ‘outside’ IR35 means the IR35 rules do not apply. The contractor can pay themselves a salary, plus further dividends which are exempt from national insurance contributions.
A contractor who is ‘inside’ IR35 will typically:
Check Employment Status for Tax (CEST): The CEST tool provided by HMRC allows a hiring company (or a contractor themself) to perform an employment status assessment. The tool can be used to understand (a) if the IR35 rules apply to a contract, and (b) if a particular piece of work is classed as employment or self-employment. The tool runs through a series of questions, whereby each response affects the subsequent questions that are asked. The questions can include (as of April 2022):
IR35 rules apply to an individual contract. This means that a contractor may undertake some contracts that are ‘inside’ IR35 and some contracts that are ‘outside’ IR35.
There are two primary engagement models for working with independent contractors in the UK.
A. Direct engagement
Direct engagement of the worker as self-employed or registered via their own limited company. To facilitate direct engagements, there are two general types of contracts to use with independent contractors:
B. Umbrella company
These firms come in two forms, and both are specially designed to vet and engage freelancers compliantly as either contract employees or independent contractors on your behalf.
The contractual relationship is between the umbrella company and the client, with the umbrella company running payroll and administration for the contractor. The umbrella company invoices the client directly while paying the contractor via PAYE as a standard employee. Umbrella companies levy a fee on the contractor to cover their costs.
In the UK, independent contractors must pay tax on all income above £12,570 (for the 2022/23 tax year). Independent contractors manage their own tax payments to HMRC, typically via the Self-Assessment process. Depending on their level of self-employed income, independent contractors might need to register to pay Value Added Tax (VAT). Unlike employees, independent contractors do not need to pay Class 1 National Insurance Contributions (NICs). However, they do need to pay Class 2 and Class 4 NICs.
It is important to note that an individual’s employment status (as an employee, contractor, or worker) does not necessarily determine their tax status. In the UK, these determinations are made by an employment tribunal and a tax tribunal (or HMRC), which are separate. One decision may influence the other, but this is not guaranteed.
We can simplify hiring full-time workers in the UK by acting as the Employer of Record (EOR) on your behalf, handling everything from contracts, onboarding, documentation, payroll, benefits, and workforce management. Reduce your time-to-hire by 90%, slash your overheads, and remain fully compliant.
