Employees or Contractors

Employees must be paid through payroll, have employment rights, and are entitled to benefits like holiday pay.

Contractors that invoice your business are typically self-employed or run their own limited companies, which are sometimes known as Personal Service Companies.

As a general rule, less tax is paid by both parties when your business pays a worker as a contractor. This is why HMRC sometimes challenge business-contractor relationships.

Burden of proof and taxation

The latest off-payroll rules (aka IR35) do not apply to small businesses of all types. This means the responsibility for applying IR35 remains with the contractor.

We recommend that you inform your contractors that they may need to apply IR35 on any income generated from their work with you. You can tell them to use HMRC's Check Employment Status for Tax tool and to save the results to support their decision.

Businesses are 'small' if they meet two of the following criteria:

  • Annual revenue not exceeding £10.2m

  • Balance sheet total not more than £5.1m

  • Average of no more than 50 employees

How to decide when to pay someone through payroll

There are a large number of factors but as a general rule we recommend that you strongly consider adding workers to payroll when you start to guarantee them shifts or hours per week or month.

Our infographic outlines the relevant factors that determine whether a worker is an employee or a contractor.

There are many factors to consider and you can also use HMRC's Check Employment Status for Tax tool to help you.

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