How to Find and Pay Contractors in the United Kingdom: A Guide for US Employers

The UK is a top destination for US companies looking to hire internationally. Learn best practices for hiring and paying contractors there.

Caitlin MacDougall

PEO vs EOR office building against a purplish sky

It's easy to understand why US companies look to the United Kingdom when hiring abroad. Like the US, the UK is an English-speaking country, with many overlaps in culture, so it's convenient to build a business there. Also similar to the US is the UK's booming tech industry. It may surprise you to learn that Cambridge, not London, is leading the startup scene in the UK in terms of venture capitalist funding, VC rounds, tech salaries, and unicorns (tech companies worth more than $1 billion). Following close behind Cambridge as startup hubs are Manchester, Oxford, and Edinburgh, in Scotland. In total, the value of UK tech companies amounts to £540 billion, with the majority of investments coming from the US (about 37%, according to 2021 data).So how can your company utilize this bourgeoning industry and hire tech-savvy contractors? First, let's talk about a couple important facets of hiring contractors in the UK, including self-employed worker classification.

Self-employed contractors 👩‍💻

There are various worker classifications in the UK, but in this article, we will focus on self-employed contractors. If a worker is self-employed, that means that they own their own business, and they are financially responsible for the success or the failure of that business. They are not obligated to work for one employer; often they will work on many projects for many different employers.Although a self-employed worker is not considered an independent contractor, in an independent contractor agreement, a contractor may be considered self-employed. Contractors set their own fixed price for a task or specific project, and can decide when they will work, and for how long, in order to complete that task. In the construction industry, for example, the owner of a construction company may set the rate for a building project, and will charge the employer for their work. They may also charge for any additional materials required for building. Like most independent contractors, however, the company will use their own tools to complete the project.

Legal requirements and protections for self-employed contractors ⚖️

Many companies in the US choose to hire contractors, particularly if they are not sure how long a project will take, or how much work they can provide. As previously mentioned, contractors may be self-employed, in which case they are entitled to certain safety and discrimination protections afforded to self-employed workers. Neither self-employed workers nor contractors are entitled to the same benefits as employees, however.

Sick pay and other types of leave

For instance, statutory sick pay is only afforded to employees. Sick pay is normally £95.85 for 28 weeks if an employee's weekly earnings meet or exceed £120. Contractors and self-employed workers do not qualify for parental leave, either.Employees are entitled to 28 days’ paid leave per year, or 5.6 weeks of holiday per year, but contractors and self-employed workers do not have this entitlement. On the plus side, if a self-employed worker or contractor wants to take a holiday, usually they have the flexibility to do so because they are not bound by a normal working schedule. Normally, these types of workers create their own hours, and as long as they are finishing their projects on time, they can manage their own schedule around a holiday.

Rest periods

And when it comes to rest periods, employers are not required to provide self-employed workers or contractors with rest breaks. These workers also do not have limits on night work the way employees do. Normally, employees receive 20 minutes of rest for every six hours worked, and they may not work more than eight hours of night work in a 24-hour period.

Employment Rights Act

Another important distinction between employees, contractors, and self-employed workers is their protections against being underpaid. The Employment Rights Act of 1996 protects employees from being underpaid or having their pay withheld, including late payments, but self-employed and contract workers are not covered under the law.

Dismissal

Employers do not need to conduct a normal dismissal procedure for self-employed workers or contractors, including giving notice or administering preemptive disciplinary action. Contractors and self-employed workers are not entitled to redundancy pay, either.

Tax law for self-employed workers

Contractors who are self-employed must follow tax laws for self-employed workers. Here's an overview of some of those requirements.

HM Revenue and Customs (HMRC)

A worker is required to tell HMRC when they have become self-employed. Sometimes, a worker may be registered as both an employee and a self-employed worker, as is the case when an employee runs their own business outside of their hours working for an employer.To register as self-employed, a worker will need a National Insurance number.

Pay As You Earn (PAYE)

PAYE, or Pay As You Earn, is the system employers use to withhold an employee's income tax from their paycheck to pay for income tax and for National Insurance. With PAYE, the employee remits tax as they earn their income. A self-employed worker does not participate in that same system, but rather registers as a self-employed worker and files their own taxes.

National insurance contributions 💷

Just like Social Security in the US, National Insurance is the system in the UK that workers enroll in to qualify for certain benefits and pensions. Depending on the worker and their income, contributions to national insurance will vary. In the 2021-2022 tax year, self-employed workers who make £6,515 or more a year, known as Class 2 workers, must pay £3.05 a week to HRMC. Class 4, or self-employed workers who make £9,569 or more a year, must pay 9% on profits between £9,569 and £50,270, and 2% on profits over £50,27.Recently, National Insurance contributions have increased in the UK by 1.25% for certain classes, including Class 1 (paid by employees) Class 4 (paid by self-employed), and secondary Class 1, 1A and 1B (paid by employers). The increase will be in effect from April 2022-April 2025.

Why companies hire contractors

With employees, an employer is required to pay payroll taxes and certain employee benefits (e.g., holiday pay, sick pay, pension, etc). Hiring contractors as opposed to hiring employees will typically save a company money on these taxes and benefits. An employer can also save money on office space in certain situations: contractors often complete projects with their own equipment outside of the business's location.And there are plenty of workers to choose from. Recently, more and more workers are choosing to become part of the gig economy in the UK. In fact, gig work has more than doubled since 2016, as many have entered the gig workforce to supplement other income.The biggest risk of hiring contractors is worker misclassification. To avoid misclassifying a worker, an employer should check to see if their worker is self-employed in tax law and employment law.

Finding and hiring independent contractors in the UK 🔦

How do you find the right talent in the UK? First, look for a reputable online job posting board. Usually, job posting sites in the US have local versions in other countries. For instance, Indeed and LinkedIn both have sites in the UK that are very popular. Reed.co.uk is another job listing site that many businesses use to scour for talent.

Role description

A detailed role description can go a long way. An ideal description for a position at your company should include the job's pay, its duties, what skills the ideal candidate would have, and any important information about your business. A company is more likely to receive applications from potential former contractors if they have specific information.When hiring abroad, sometimes a translator is necessary in countries where English isn't the official language. Obviously in the UK, that's not a problem—one of the many advantages to hiring there.

Interviews 👥

Almost all interviews are virtual these days, and it will be your most convenient option when you're conducting a job search in the UK. Just don't forget the time zone difference! The UK is seven hours ahead of Pacific Standard Time (PST) and four hours ahead of Eastern Standard Time (EST).

How to pay independent contractors 💸

What are the best payment options for paying an overseas contractor in the UK? Here are some of your options as a business owner or company administrator.

Bank transfers using SWIFT 🏛

Many companies use SWIFT for wire transfers. SWIFT stands for The Society for Worldwide Interbank Financial Telecommunications: it is a network of global financial institutions that has proven to be a secure option for wiring money. With SWIFT, there is very little risk that payments will not make it into a foreign worker's bank account.There are additional bank fees that can reduce a payees' compensation, however. SWIFT payments are routed through multiple banks before they reach the contractor’s bank, and a fee is usually charged each time there is a transfer. Even if the same banks are used each time to pay a contractor, the total cost for transferring funds may vary. This can make payroll unpredictable, which is a nuisance for both the payer and the payee.

Money transfer companies 💳

Another option is to wire payments through money transfer companies. Companies like Remitly, Xoom (owned by PayPal), and Wise (formerly Transferwise) are accessible online, and they provide lower markups on exchange rates.Unfortunately, these companies often require that payees use company-issued debit cards to access their payments, and these cards can come with withdrawal fees. Money transfer companies also charge percent-based fees, and sometimes they add markup fees for exchange rates. The fees aren't as bad as the ones you might be charged with using SWIFT, but they're still inconvenient for both contractors and businesses.

Traditional money transfer services 🏦

MoneyGram and Western Union are traditional money transfer services that have both online services and physical locations, which is convenient for payees. Furthermore, these companies have better markups on currency rates than traditional banks do. You can't evade percent-based fees or markup fees with these services, however. Often these fees still apply for currency exchanges.

Cryptocurrencies 🤑

Although digital currency has become increasingly popular across the globe, not everyone is set up to receive payment this way. In the UK, for instance, Paypal now offers the ability for users to purchase, hold, and sell cryptocurrency, but payments still must be made in cash.

Compliance

Getting a business set up in another country can be complex, and many companies find it challenging to go at it alone. In many countries, the legal requirements for classifying and hiring workers are strict in an effort to thwart worker exploitation.For example, an employer may misclassify an employee as a self-employed worker purely out of ignorance, but other employers might deliberately misclassify a worker to circumvent paying that worker minimum wage, or for tax avoidance. In the eyes of the law, the consequences are the same: a wrong employment status may result in fines, legal fees, back taxes to the government, and back pay to workers who were misclassified.It is important to seek expert advice on worker classification when hiring abroad, to make sure you're complying with local employment laws in the countries where you're hiring. One option is to work with an HR and payroll platform that supports both hiring international contractors and has legal entities in countries where you might hire employees. It's a smart way to manage HR and international employment laws abroad so that both you and your workers are protected.

Legal Disclaimer:

The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.

Partnering with Pilot 🤝

Pilot is here to help your company with all of its HR needs. From compliance to remote payroll, our international and fully distributed team has expert knowledge on everything you need to know to hire abroad. We can help you secure work permits, pay your contractors, and navigate labor laws around the globe. Small businesses and large corporations alike look to our professionals to help them navigate the complex aspects of hiring and maintaining contractors and employees.When it comes to our payments system, we never mark up currency exchange rates, and we don't require that contractors use a debit card or e-wallet. Funds go straight to your independent contractors’ bank accounts instead. We support payments in over 240 countries around the world. It's easy to see why contractors love us as much as our clients.

Going global isn't daunting when you partner with Pilot. 🤝

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