UK
United Kingdom
in numbers
The UK offers a supportive legal environment for self-employment, with clear regulations and positive recognition by local authorities. Registering as self-employed is relatively simple, making the country attractive to independent workers. Additionally, Employer of Record (EOR) services are well-integrated into the business ecosystem, providing flexibility for contractors and businesses alike.
The UK scores low in this category due to its strict and comprehensive contractor classification rules. Authorities actively investigate potential cases of misclassification, using a wide array of factors such as control, contract terms, and level of independence to determine whether a worker should be classified as an employee or self-employed.
The UK scores highly in tax-related matters thanks to its relatively low tax rates for mid-level income earners, making it financially appealing for self-employed individuals. The tax system is user-friendly, with an efficient online process.
The UK also performs well in this area because the tax gap between self-employed individuals and traditional employees is small, just 2.1%. This low difference minimizes financial exposure, and transitioning between employment types is not overly risky.
It is easy to register a business in the UK, including receiving payments and opening bank accounts. Whether working with local clients or international customers, self-employed individuals can efficiently manage business operations without facing significant barriers.
The UK scores 0 in this category, as it currently does not offer a dedicated digital nomad visa or similar visa programs tailored for self-employed individuals or freelancers looking to work remotely while residing in the country.
Key takeaways
The UK is a thriving hub for freelancers and remote workers, offering a seamless process for self-employed individuals to register their businesses and manage taxes with ease. Its world-class digital infrastructure and advanced financial services make international transactions and remote operations effortless. For global companies, the UK provides a supportive environment to build agile teams. However, with its strict regulations on contractor and employee classification, thoughtfully crafted contracts are essential to fully unlock the potential of the UK’s dynamic workforce.
Frequently asked questions
You can hire self-employed contractors without a local entity in the UK, but you cannot hire employees without using a local entity or Employer of Record (EOR). Self-employed contractors will be responsible for declaring and paying their own taxes and contributions. Pay attention to the shape and nature of the contract and the work to avoid misclassification issues. More details below.
Using an EOR is permitted under local law, however note this often results in an employment relationship being established between your company and the team member. Should this be the case, a Permanent Establishment may also be created, depending on the employee’s activity in the UK.
If you hire contractors via a foreign entity (i.e. if you do not use an EOR), there will be no tax withholding or declaration requirements as the team member will handle their own taxes.
You can offer health insurance as part of the compensation package to UK contractors. While this is not yet common practice, it will not in itself change the misclassification risk, as long as the contract and nature of the work indicate that your team member is an independent contractor.
Determining the correct contractual relationship
If the contract is reviewed by the UK authorities, they would determine the relationship is a B2B relationship if the self-employed:
- Can choose their work location, schedule, and number of working hours
- Can provide services to more than one company or the contract does not restrict them from doing so
- Can decide how the work is performed
- Have a payment structure by the job or project
- Have the ability to subcontract
- Bear certain risks, such as financial or reputational risk
If the relationship does not meet most of the criteria above, it will most likely be classified as an employment relationship. Read the next sections to understand what the exposure might be in the event of a reclassification.
Financial risk associated with a potential contract misclassification
If the contract is not classified correctly, the authorities might request payment of additional benefits or taxes if they happen to conduct a compliance review of your working relationship. In case the team member has not been provided with benefits (similar to an employee), back-paying those benefits may also be required.
Misclassification claims in the UK have a statute of limitations of 1 year.
Additional taxes
2.1% more taxes are owed overall for an employee than for an independent contractor1, which are due by the company (i.e. deemed employer). If the self-employed contractor has claimed deductions on their tax return, additional taxes may be due for the respective portion of income, as such deductions are not typically applicable to an employee.
What could trigger a compliance review?
Misclassification reviews can be triggered by tax audits, complaints, whistleblowers, well-publicized cases, or industry-specific audits.
How will any additional amounts be charged?
If the authorities reclassify the relationship, they will charge any additional amounts due to the company (i.e. not to the self-employed). If the company is not registered in the UK, the UK authorities often use bilateral agreements that allow the collection of taxes with the assistance of the corresponding authorities in the entity’s residence country.
Will a local contractor trigger a permanent establishment?
Having a team member in the UK does not typically create a Permanent Establishment (PE)*, even for long-term contracts between your (foreign) entity and the UK contractor. This is also not regularly checked during a compliance review of the self-employed and overall, the PE risk is lower than if you have local employees in the UK (e.g. employed directly or via an EOR).
*A PE represents a fixed place of business through which a foreign company conducts its commercial activities in the UK. If a PE is established, the business income associated with it will be subject to local taxation.
Is paid health insurance one of the indicators used by local authorities to determine if a worker is misclassified?
Companies often choose to cover health insurance premiums for their team members, irrespective of whether they are employees or contractors. Paid health insurance may be used as a classification indicator, but only in combination with other criteria such as the points mentioned above, which carry more weight in the overall assessment. It is never used as a standalone indicator and it does not significantly alter the contractual relationship.
To reduce misclassification risks, it's important to ensure that the contract is carefully structured to maintain the self-employed status, the terms of the insurance benefit are clearly defined in writing. Legal consultation and well-drafted contracts play a critical role in achieving compliance. You should also find an insurance partner whose policies can cover contractors.
1 To keep things comparable, we use a gross income of $4,000/month to determine the potential exposure. The calculation takes into account equivalent taxes paid to the authorities by the self-employed person during the same period of time. The exact amounts might be different depending on your regular payouts.
About the Future of work index
This information is provided by SafetyWing in collaboration with a Big 4 company to assist companies in understanding potential compliance risks. While we strive to provide accurate and up-to-date information, it should not be used as the sole basis for ensuring compliance. Individual circumstances and changing laws may alter the applicability of this information. Please seek appropriate professional support.
