Hiring contractors: What you need to know

CONTRACTORS

Hiring Contractors: The Essentials for UK Employers

If you're hiring a contractor, understanding legal and tax obligations is essential. Here are the must-know basics to keep your business compliant and avoid costly mistakes.

1. IR35: Know the Status

IR35 determines whether a contractor should be taxed like an employee. If a contractor is essentially working as a full-time employee — under direction, control, and without the right of substitution — HMRC may classify them as "inside IR35".

  • Inside IR35: Treated like an employee for tax purposes. Full tax and National Insurance must be deducted.

  • Outside IR35: Operates as a true business. May take income through salary and dividends.

Who decides the status?

  • Public sector and medium/large private companies: You (the client) must assess IR35.

  • Small private companies: The contractor is responsible.

Get this wrong, and liability sits with you — not the contractor.

2. Engagement Route: Umbrella vs Limited 

You must agree how the contractor will be paid:

  • Umbrella company: They are employed by the umbrella, and paid through PAYE.

  • Limited company: Contractor operates their own PSC (personal service company) — allowed only if outside IR35.

This choice impacts tax, compliance and administrative responsibility.

3. Contract & Compliance Essentials

Make sure your contract includes:

  • Clear deliverables or scope of work

  • Start and end dates

  • Payment terms (day/hourly rate)

  • IR35 status (and supporting status determination statement if needed)

  • Notice period

  • Confidentiality and IP clauses

Also ensure:

  • Right to work checks are completed

  • The contractor (or umbrella) holds professional indemnity and public liability insurance

4. Understand the Cost Model

Contractors:

  • Are paid only for time worked

  • Do not receive holiday, pension, or sick pay (unless umbrella-employed)

  • Typically command higher day/hourly rates than permanent staff

5. Offboarding & Handover

Before the contract ends, consider:

  • Will you extend?

  • Is a handover or documentation needed?

  • Has access been removed and IP secured?

Final Word

Contractors can offer speed, skill, and flexibility — but only if your processes and compliance are solid. IR35 is non-negotiable. If you're unsure, get expert help.

Need clarity or support with contractor hiring? We’re here to help.