Employees vs contractors
Growing businesses need to take on new staff, and choosing the right people is crucial for cost management, compliance and a positive working environment. While many positions are best filled with full or part-time employees, some businesses turn to independent contractors to fill skills gaps or handle temporary projects. Some even choose to make up the majority of their workforce with contractors.
Deciding whether an employee or a contractor is the best fit for a role is an important consideration. Here we discuss the difference between the two and what it means for your company.
What is the difference between employees and contractors?
Whether you hire an employee or contractor has certain tax implications for your business and affects the legal rights you must afford the staff member. HMRC’s employment status manual offers guidance on how to determine how workers should be categorised. You’ll need to consider:
- who has control over working times and locations
- whether the individual must personally provide their service
- who provides the required equipment
- how the person is paid
- whether there is ‘mutuality of obligation’ i.e. whether the employer must provide work and the individual must accept it
- What rights you have provided to the individual and what responsibilities you have towards them
- whether they are treated as part of the business
If you hire a self-employed contractor and then restrict their activities such that they should be treated as an employee, you can risk fines, historical tax charges and even court proceedings.
Considerations for hiring an employee
When hiring an employee, the employer is responsible for paying them on time, deducting the correct income tax and NICs (for employees on PAYE), and adhering to legal obligations. If you require the individual to work exclusively for you, expect to fully integrate them into your business, and wish to control how, when and where their work is completed, you will likely need to class them as an employee.
Hiring an employee is usually used for filling a more permanent role, unless it’s a fixed term contract with a specific end date.
Considerations for hiring a contractor
Contractors may be self employed or working through a personal service company (PSC). If you hire a contractor through a PSC, you’ll need to consider if off-payroll rules (IR35) are applicable. Contractors often set their own working times and locations, may not be obliged to cease working for others during their term of employment with you, and/or do not usually benefit from holiday pay, sick pay and other rights.
Many smaller businesses (those with a turnover of under £10.2 million and/or a balance sheet of less than £5.1 million and/or under 50 employees) only employ contractors through a PSC. This is because it avoids potential issues with HMRC. In the case of small businesses, the contractor is responsible for complying with off-payroll working rules, not the employer.
Where can I get support?
Whether you are looking to hire a contractor working through a PSC or an employee, a reputable accountant can help ensure you are complying with regulations, paying the right amount of tax and effectively managing benefits such as pension auto enrolment and benefits in kind.
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