Undecided about whether to hire a freelancer, contractor or employee? Read on to find out who would be the best fit for your business. The post Hiring freelancers, contractors or employees: What’s best for your business? appeared first on Sage Advice United Kingdom.

Things are changing in your small business for the better.

Maybe you’ve won a big contract and need some help fulfilling it. Or you’re in a position to expand and need to bring on more people.

You know the answer to growing your business is more workers, but should you hire a freelancer for short-term help, a specialised contractor or a full or part-time employee?

This article explains the pros and cons of hiring freelancers, contractors or employees and their implications for your small business.

Here’s what we cover:

What to consider when deciding who to hire

Think about your reasons for hiring.

Is there a skills gap? Is your business going in a different direction? Is it growing?

Dave Chaplin is the CEO and founder of IR35 tax compliance firm IR35 Shield.

He says: “Is the requirement for an individual to provide skills on an ongoing basis for fixed hours per week or month or for a one-off project that needs completing? If it’s the former, then the firm needs an employee.”

Here’s a checklist of additional points to consider when hiring:

Employment laws

Freelancers and contractors normally don’t have any rights under employment law. Employees have statutory rights, such as holiday pay and auto-enrolment pensions (f they’re eligible).

An employee might be the best option if you need the stability of someone to work with you long term.

Tax

You’re responsible for deducting PAYE tax for your employees. Freelancers and contractors are responsible for paying their own tax.

You might consider hiring a freelancer or a contractor if you want to be free of the admin burden that comes with deducting tax.

National Insurance contributions

Freelancers are responsible for paying Class 2 and Class 4 National Insurance contributions (NICs). Contractors also make their own NIC contributions. You’re required to pay Class 1 for your employees.

Freelancers and contractors are the better choice if you would prefer not to deal with deducting NICs.

Employee benefits

Freelancers and contractors have no rights to employee benefits, such as sick pay or pensions. You’re required to provide employees with benefits, such as holiday pay and maternity/paternity pay.

Hiring a freelancer could be the smart choice if you don’t have the budget for employee benefits.

Contracts

The contract for freelancers normally outlines the scope of work, duration and how much you’ll pay.

You can either provide contractors with a project-based or fixed-term contract.

Employees have a detailed employment contract, which outlines their responsibilities, rights, and terms and conditions.

If you’re looking for flexibility without the legal burden, then hiring a freelancer or a contractor is a good choice.

Work environment (on-site, remote or hybrid)

Freelancers choose where they work, so they normally work remotely. Contractors work at the location that’s agreed in their contract with you. Employees work wherever you need them to.

Employees could be your best bet if you want a degree of control over the work and where the work is done.

Equipment

Freelancers and contractors use their own equipment. However, you may need to provide specific equipment to contractors.

You’re responsible for making sure employees have all the necessary equipment they need to do their jobs. Freelancers provide the best value for money in terms of equipment costs.

Payroll

Freelancers and contractors produce an invoice detailing the amount you have to pay them (the rate would have been agreed on beforehand).

You need to provide payroll management for your employees. You might want to think about using freelancers and contractors if you want a hands-off approach to payroll.

What’s the definition of a freelancer?

Freelancers are sometimes known as sole traders. They are self-employed professionals who handle their own taxes and don’t receive benefits.

In 2024, there were about 2.05 million freelancers in the UK.

“They’re ideal for short-term or specialised work,” says Joanne Bell, managing director of accountancy practice Bells Accountants.

But Dave cautions that “sole traders present a tax risk where HMRC can investigate and rule that the sole traders were really employees, leaving the firm with a sizable tax bill”.

So, it’s important to understand what makes a worker a freelancer according to HMRC guidelines.

Advantages of hiring freelancers

The flexibility of freelancers is a plus for small businesses. They’re usually available to fill in skill gaps, at short notice.

With freelancers, there’s less of a contractual and legal burden compared to employees.

“There are not normally any HR issues to take into account as you are not the freelancer’s employer, but it is important to ensure that you have a contract in place,” says Mike Keeling, director of Meades Umbrella, a company that provides umbrella services for contractors and freelancers.

Dave sums up the main benefit of hiring a freelancer, saying, “The freelance arrangement is remarkably straightforward – you specify the project requirements and deliverables, agree on a price and the work is completed.”

Disadvantages of hiring freelancers

Hiring a freelancer could cost your business less than an employee over the long term but, according to Mike, “A freelancer traditionally would be paid more than an equivalent permanent employee—after all, they come with a specific skill set that commands a price.”

Another disadvantage is a lack of quality control. Freelancers have complete autonomy over their work, so there’s little in the way of quality assurance.

The process of finding a qualified freelancer can be time-consuming.

Dave says another downside of hiring a freelancer is that sole traders could claim they are “workers” under employment law and seek additional rights and holiday pay.

What’s the definition of a contractor?

Similar to freelancers, contractors can also be self-employed and are hired by your business to provide services, but they aren’t employed by you.

However, in some cases, contractors can have the employment status of a worker or an employee if they’re employed by an agency and work for a client.

Contractors are responsible for their own tax and are governed by IR35 rules.

Consider hiring a contractor if you need someone with highly specialised skills and your project will last for a significant amount of time.

The contractor terms would normally be specified in a fixed-term contract.

Benefits of hiring contractors

Dave says, “Contractors who operate via limited companies offer an advantage to small businesses.

“The risk of misclassifying a contractor as being outside IR35 does not apply when small companies hire contractors. The IR35 reforms only shift the risk to firms once they are medium or large.”

Due to the size and complexity of the work involved, contractors normally work with one client at a time. This means you have more control over how the work is performed.

It’s not unusual for contractors to work at your business premises, which can result in forming stronger working relationships.

Although contractors demand high fees, they could be more cost effective because you don’t have to pay employee costs.

Drawbacks of hiring contractors

Contractors generally charge high rates, so it’s important to budget for these costs.

The contractor can work for a competitor when they have completed your project. You can protect yourself by including a non-compete clause and a confidentiality agreement in the contract.

Mike states that compliance “isn’t normally a major issue for small businesses who fall under the IR35 threshold and you won’t have to worry about dealing with disguised employment issues”.

He adds, “If, however, your business is over the threshold, it is your responsibility to ensure that your contractor is paying the correct amounts of tax and National Insurance so you may need to check how the worker is paid—via their own limited company or via an umbrella [company].”

What’s the definition of an employee?

An employee is someone who works for your business—full time or part time—on an ongoing basis.

They may also have signed an employment contract.

An employee is required to work a specified number of hours. You’re also responsible for deducting income tax and National Insurance contributions for your employees. They normally work at your place of business, but can also work remotely or on a hybrid basis.

Dave adds, “Employees are entitled to employment rights including minimum wage, sickness rights, maternity/paternity rights, etc.”

Think about recruiting a permanent employee when you have ongoing work.

Pros of hiring employees

An advantage of hiring employees is that you have more predictability because there’s a dedicated person doing work over the long term. This enables you to more accurately forecast your cash flow.

Employees can contribute to a strong business culture. This can lead to greater collaboration and better results for your business.

Overall, you have more control when you hire employees since you set their working times, targets and performance indicators.

Cons of hiring employees

Dave notes that, “Employees require the most administration as you are responsible for their income tax and NICs via PAYE and must maintain accurate payroll records.”

The cost of salaries, tax responsibilities and benefits quickly add up and can be a disadvantage of hiring employees.

Employees require training and development, which can be time-consuming and costly because you might need to hire a manager to take on this role if you’ve not got one in place already.

Lack of flexibility is another downside of hiring employees. If your business experiences a downturn, it’s more difficult to adapt to the new circumstances when you have permanent employees.

You need to be aware of and compliant with all employment laws to ensure you avoid falling foul of legal requirements.

Final thoughts

Deciding whether to hire a freelancer, contractor or employee depends on your company’s needs, budget and long-term objectives.

Freelancers offer dedicated skills and optimal flexibility, contractors provide high-level expertise for certain projects, and employees bring stability and commitment.

But combining freelancers, contractors, and employees may be the smartest way to position your business for success.

“The optimal solution often involves strategically combining permanent employees with flexible talent,” says Dave.

Joanne agrees, adding, “A mix of all three can provide flexibility while ensuring compliance with HMRC rules.”

The post Hiring freelancers, contractors or employees: What’s best for your business? appeared first on Sage Advice United Kingdom.

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