The UK is filled with vibrant, populous cities like London, Edinburgh, and Cardiff, all of which have diverse, educated, and talented English-speaking workforces. All of these factors make hiring independent contractors in the United Kingdom a popular choice among companies worldwide. But when it’s time to pay them, what steps do you need to take to comply with UK Employment Law?
In this guide, we’ll go over the steps to correctly classify contractors, put them on the payroll, and fulfill their invoices, all while remaining compliant with UK labor laws.
Step #1: Classify your workers correctly
While UK Employment Law doesn’t protect independent contractors the same way it does full-time employees, it is quite clear about worker classification: Misclassifying your employees and independent contractors is a serious violation that will cost you back taxes and other financial penalties from His Majesty’s Revenue and Customs (HMRC).
Specifically, depending on the details of the case, penalties from the HMRC could include:
- Up to 100% on the amounts due, in addition to requiring you to pay the back taxes themselves and interest on the late payments
- Backdated pension contributions, in addition to requiring you to immediately enroll employees misclassified as independent contractors in the proper pension and social security schemes
- A flat-rate penalty of £400, plus £50 per day for employers with one to four workers and up to £10,000 for companies with 500-plus workers
In extreme cases where the HMRC can prove that an employer knowingly and willfully misclassified an employee or independent contractor, criminal charges can be filed by the appropriate Regulator against that employer.
To help employers avoid the penalties that come from misclassifying workers, the HMRC has made it extremely easy to check someone’s employment status. All you need to do is go online to the gov.uk website and use the Check Employment Status for Tax (CEST) tool. If you’re having trouble or the CEST tool doesn’t produce any results, you can reach out to the HMRC for help.
Despite the availability of these tools, it’s still a good idea for you to be at least somewhat familiar with Inland Revenue 35 (often called IR35) legislation, which ensures that independent contractors don’t avoid paying their taxes. If an individual falls “inside” IR35 legislation, they’re classified as an employee. If they fall “outside” IR35 legislation, they’re an independent contractor.
A worker should be classified as an independent contractor in the UK if:
- They can control their own schedules and how they perform the responsibilities assigned to them
- They’re not directly supervised by a specific manager at the company
- They have the right to refuse to take on certain tasks entirely
- They’re allowed to send a substitute to complete their work
- They have to use their own equipment and tools to complete their work; nothing is provided by the employer
- They have to submit an invoice to receive payment for the work they’ve done
- They provide quotes to the employer or submit bids to receive work
- If they take a day off, whether it’s for vacation, personal reasons, or because they’re sick, they’re not paid for their leave of absence
You should draft an independent contractor agreement that makes these and other factors very clear in writing. Do not skip the agreement and rely on verbal promises or emails to replace an official contract that establishes a worker as an independent contractor in writing and protects you from legal action.
Independent contractors are responsible for paying their own taxes, whereas employers are responsible for deducting employees’ taxes from their paychecks.
Step #2: Determine the best way to pay your contractors
Now that you’ve classified your new hire as an independent contractor, the next thing you’ll need to figure out is exactly how you'll pay them. The gig economy exploded in popularity during the COVID-19 pandemic, and remote work is here to stay. Both of these factors have resulted in employers having more choices than ever to pay contractors, even if they don’t live in the same country as you.
Here are a few options you can explore for paying your international contractors:
- Bank wires. Open a bank account in the United Kingdom and direct deposit funds into UK contractors’ accounts. You can also send a global wire transfer via your own bank account.
- International money orders. Money orders have been around forever, and they might be the first thing that comes to mind when you’re deciding how to pay your contractor. However, they’re not the best option for a few reasons. First, they max out at $1,000 and come with fees. So, every time your contractors’ paychecks are above $1,000, you’ll have to send another money order and pay big fees each time. Additionally, they’re not very secure and are extremely prone to scams. Legitimate independent contractors are unlikely to ask you to pay them using this method these days, so be wary of anybody who picks international money orders. They might be posing as a contractor and trying to scam you.
- Digital wallets or payment platforms. Digital wallets can be great for paying independent contractors who live in the same country as you. However, if they don’t, they’re not the best choice, simply because the digital wallets and payment platforms available in each country differ across the world. For instance, one of the most popular e-wallets in the UK is Revolut, which isn’t something US employers use.
- Global payroll services. Typically, contractors aren't included in payroll, since they aren't subject to the same withholdings as employees—instead, they invoice for their services, which goes through accounts payable for many companies. But with Rippling, you can pay UK employees and UK contractors, wherever they are, in a single pay run.
Step #3: Use global payroll software to process payments
As you saw in Step #2, there are multiple ways to pay contractors in the UK. But the fastest and simplest way is paying contractors through global payroll software.
With Rippling, you can pay employees and contractors, across the world, in a single pay run. Here’s a preview of how Rippling’s global payroll system works:
Step #4: Get assistance from a global payroll system
Employers aren’t required to enroll in the PAYE scheme when they hire independent contractors because the latter are responsible for paying their own taxes. They only need to enroll in the scheme if they’re hiring employees.
Head spinning? One of the benefits of processing payments through a global payroll system like Rippling is offloading the paperwork—and letting us do the calculations and filing for you.
FAQs about paying contractors in the UK
Do you need to withhold taxes when paying contractors in the UK?
No, foreign companies don't have to withhold payroll taxes when paying contractors in the UK. Contractors are required to pay all of their own taxes.
Does the UK minimum wage apply to independent contractors in the United Kingdom?
No. Self-employed individuals, including independent contractors, are not entitled to the National Minimum Wage.
Do UK contractors get benefits?
No, independent contractors in the UK are not entitled to employee benefits. If you offer them to your independent contractor, the HMRC will likely decide to take a closer look at your classification system, and you run the risk of being found legally liable for the back taxes and other penalties discussed earlier in this guide.
Can you pay contractors in the UK in your home currency?
Yes, you can pay UK contractors in your home currency, but they have to agree to it. However, it’s unlikely your new hire will say yes to this. They’ll likely ask to be paid in GBP to avoid the hassle and fees that come with converting currency.
Can you manually pay contractors in the UK?
Yes, and it's common for small business owners to manually process contractor payments in an attempt to cut costs. But this can be time-consuming, especially as your business grows and if you work with multiple contractors in the UK or across borders.
It's also important to note that manually processing payments comes with some risks:
- Compliance. Running payroll manually means assuming the risk of human error and omission. Protect yourself and your business with Rippling, which automatically enforces compliance with any applicable local laws—no matter where your contractors live.
- Security. Manual payroll processing also poses security risks, especially if you use spreadsheets or paper records. Sensitive employee information can be lost, stolen, or misused.
Make payroll automatic by using Rippling. Rippling syncs all your business's HR data with payroll, eliminating the need for manual data entry entirely. Employees and contractors all over the world get paid quickly (and compliantly) in a single pay run. Plus, Rippling is an authorized payroll provider by the HMRC.
How do you turn a contractor into an employee in the UK?
While hiring independent contractors over full-time employees can come with financial benefits, sometimes you do need a full-time employee. The challenge is making sure all the legal requirements are in order: UK labor laws require payroll deductions, including pension and social security deductions, benefits, and more for employees that you don't have to worry about for contractors.
With Rippling, you can effortlessly manage contractors—as well as quickly transition contractors to full-time employees—with legally compliant paperwork, benefits administration, payroll, and more. Rippling handles it all, so you stay compliant from onboarding to offboarding.
Rippling and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.