How to pay contractors in the UK

When hiring a contractor, it's important to keep in mind that there is a variety of payment considerations you may wish to explore, so unfortunately there’s no quick and easy answer to the issue of how to pay contractors in the UK, writes Deb Murphy, head of operations at the Freelancer & Contractor Services Association (FCSA).

Different engagement model = different way contractors get paid

You might be looking at hiring a contractor directly, or engaging with them through their own limited company. Or perhaps you will outsource the administration through an employment business who may in turn utilise an umbrella company to ensure the contractor has employment rights and that they are paid correctly, with the correct deductions being paid across to HMRC?

Whichever model you choose, it's essential to have a solid understanding of these options to ensure that you are meeting your obligations and that you are compensating your contractors fairly and equitably.

There are many factors to consider, but by carefully considering how they apply to your specific situation, you can help ensure that your contractor relationships are productive, positive, and within the rules -- for all parties involved.

If ‘to payroll or not to payroll’ is the question, what's the answer?

On April 6th 2017, the Off-Payroll Working Rules came into force in the public sector, and this was followed by expanding such new IR35 rules into the private sector -- on April 6th 2021.  

Simply put, if two of the following conditions apply -- your company has an annual turnover of more than £10.2 million; a balance sheet of more than £5.1 million, or more than 50 employees, you are classed as a medium/large employer. If that’s you, it will be your decision about the IR35 status of the contract workers you hire. 

Status Determination Statements, working practices, CEST

You may wish to engage directly with limited company contractors, and if so, you would need to conduct a status review and provide a Status Determination Statement. The review would need to consider working practices including but not limited to the right of substitution, mutuality of obligation and whether there is any control by you, as the end-hirer, in the role.  

If your decision, perhaps using HMRC’s CEST tool as a sense-check, demonstrates that the worker would fall inside the IR35 rules, then you would likely want to consider another engagement option.

The next question for you to answer could be - do you want your contractors to have full employment rights? 

If ‘yes’, the contractors would need to be classed as employees, rather than ‘workers’ or ‘self-employed.’

Agency PAYE, or Umbrella PAYE?

At this stage, you could choose to engage with a recruitment agency (an employment business) as this would help remove the administrative burden placed upon end-hirers, including when it comes to payment to contractors. 

The agency would also take on the responsibility of finding the contractors for the role, and sometimes agencies even assist contractors with their weekly timesheets, leaving you to the important matter of running your business.

Some agencies can operate a PAYE function in house, but many choose to outsource this to an umbrella payroll provider, leaving the agency to do what is important to them – recruitment.

One of the reasons that umbrella companies are a preferred choice for end-clients, agencies and contractors alike, is that they offer a convenient and hassle-free payment process.

HMRC deductions, overarching contracts and outsourced payroll...

Essentially to pay a contractor, the umbrella company takes care of all the necessary tax and National Insurance Contributions (NICs) which the contractor owes to HMRC, and also provides them with a detailed reconciliation and payslip, outlining their earnings.  

Furthermore in this instance, the contractor is employed through an ‘overarching contract of employment,’ meaning when the contractor finishes their assignment (with you), and begins a new role (elsewhere), their employment continues. This model allowing them to access the same benefits as a permanent employee.

If you’ve chosen to explore the route of outsourced payroll, you as the ultimate end-hirer would agree a rate with the agency and, in turn, the agency would agree a rate with the contractor.

Don’t forget timesheets, or potentially the AWR

Then, in practice, once the contractor has worked a week they would ask you to sign off their timesheet, and the umbrella company upon receipt of this would pay the contractor their weekly wage. 

Invoices sent at a regular time per week or per month throughout the chain, would ensure that the agency receives the money from you, and the umbrella receives the money from the agency.

Once the contractor has been on the assignment with you for 12 weeks, you should expect a request for information regarding comparator pay as required by the AWR (Agency Worker Regulations). You can find more details about the AWR on .gov, but it’s a large subject, for another day!

Final contractor payment considerations (including where to get further help)

Whichever engagement model you decide on when hiring a contractor, it's important to understand the different payment considerations which arise from each. This will help you to ensure that you're compliant with relevant legislation and that you're paying your contractors fairly.

Still stuck? Our web portal is a regularly updated resource for information on contractor payments and other contractor-related issues, with a vast amount of information via downloadable resources and even live webinars, including guidance on IR35, invoicing, and timesheets.

Thursday 27th Jul 2023
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Written by Deb Murphy

Deb Murphy has worked within compliance for over 15 years, both in operational and technical roles.  Prior to joining FCSA, Deb worked within the insurance sector, before moving to an umbrella, CIS and accountancy provider. As head of operations at FCSA, Deb is responsible for the actions behind the scenes including membership, compliance and events. 

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