Employee vs Self-Employed vs IR35: A Plain-English Guide

When you just "need someone in to help", it's tempting to pick a label – employee, freelancer, contractor – and hope the law falls into line. In the UK, it works the other way round: the law looks at what the relationship really looks like and only then decides employment status. That status affects tax, NICs and employment rights, and IR35 adds an extra layer when you're dealing with limited-company contractors.

For a complete set of ready-to-use documents, see our people and HR legal pack.

Employment status in a nutshell

Employment rights and tax are separate questions. For employment rights, there are three categories:

• Employee: works under a contract of employment and gets the full set of employment rights
• Worker: must do the work personally and is not running their own business with you as a client or customer, and gets some rights, such as holiday pay, the minimum wage and whistleblowing protection
• Genuinely self-employed: in business on their own account, with you as a client

Tax status is a separate assessment by HMRC. Whether someone works through their own limited company does not decide their employment-rights category; it is what brings in the IR35 rules described below.

HMRC and tribunals look at factors like:

• Control: who decides what work is done, how, where and when
• Personal service: must they do the work themselves, or do they have a real right to send a substitute
• Personal service: must they do the work themselves, or do they have a real right to send a substitute
• Personal service: must they do the work themselves, or do they have a real right to send a substitute
• Mutuality of obligation: is there an ongoing obligation to offer and accept work
• Integration: are they part of your organisation, on your systems, representing your brand day to day
• Financial risk: do they invoice you, can they make a loss, do they provide their own equipment and insurance

What you call the arrangement in the contract matters far less than how it plays out in reality.

Employee vs self-employed: practical differences

Employees:

• are on payroll, with PAYE and NIC deducted at source
• usually work set hours, under your control and supervision
• are integrated into your team and systems
• gain statutory rights over time – holiday, sick pay, notice, redundancy pay, unfair dismissal protection (if eligible)

Genuinely self-employed people:

• invoice you, handle their own tax and NIC
• often work for multiple clients
• can usually decide how and when to do the work, within the agreed scope
• supply some or all of their own equipment and may carry business insurance

A classic SME example: if someone is working for you 5 days a week, long-term, using your kit, managed by your managers, they are highly likely to be an employee in the eyes of the law, even if you've called them a "freelancer".

Where IR35 fits into the picture

IR35 is the shorthand for tax rules that target "disguised employment" where a person works through their own limited company, but in practice looks like your employee.

• It applies to "off-payroll working" where the contractor's company invoices you, rather than the individual contracting as a sole trader
• The core question is: ignoring the company, would this person be an employee if you hired them direct. If yes, IR35 may apply
• If you are a public authority or a medium or large private-sector business, Chapter 10 of Part 2 of ITEPA 2003 makes you, as the client, responsible for deciding the contractor's status, and you or the fee-payer may become responsible for PAYE/NIC if the engagement is "inside IR35"
• If you are a small private-sector business, Chapter 8 applies instead and the contractor's own company decides its status

IR35 does not technically apply to sole traders, but you can still face tax and status challenges if HMRC thinks you have mis-classified what is really employment.

Common SME scenarios (and pitfalls)

• "Our 'freelancer' has been here 4 days a week for 18 months" – high risk they are an employee in reality, and IR35 may be in play if they're using a limited company
• "We rotate several contractors through short projects" – more scope for genuine contractor status if they have other clients, control their work and bear some financial risk
• "We pay a day rate and they wear our uniform/use our systems" – this points towards employment-type control and integration, regardless of what the invoice says

A simple pre-hire checklist

Before you decide what paperwork to issue, ask:

• Do we want (or need) to control hours, place of work and detailed how-to
• Will they work only for us, for a long period
• Are they taking commercial risk, supplying their own kit, or building a business in their own name
• Are they contracting personally, or through a limited company (and if so, have we considered IR35)

If most answers point towards control, integration and long-term commitment, you're usually safer treating them as employees or workers and using proper employment contracts. If you're unsure, take advice from your accountant on the tax position, and obtain employment-law advice where the working relationship is uncertain, before you start.

Related reading

• Uk Employment Contract Essentials
• Essential Hr Documents For Smes