The risks of treating workers as self-employed
If HMRC reclassifies a self-employed person as employed, it can cost you
Paying someone as self-employed can look cheaper: no Employer National Insurance contributions, no pension to fund, and no employment rights. But if the working reality is really employment, that saving is an illusion with a bill attached, and it is your company that ends up paying it.
This article is about taking someone on directly, as an individual working for your company in their own name. Where a worker invoices your company through their own limited company instead, different rules apply, and as a small company you are usually protected.
Is the person genuinely self-employed?
That depends on how the work actually operates, not on what the contract calls it - things like whether the person works for other clients, can send a substitute, provides their own equipment, and carries the financial risk of the job.
What happens if HMRC reclassifies
If HMRC decides the person was really an employee, your company owes the PAYE and National Insurance contributions it should have deducted. Because you took the person on directly, rather than through a company of their own, the small-company protection that applies to contractors does not help here: your company carries the bill whatever its size. There is usually no realistic way to recover that from the worker, so your company absorbs it, along with interest and penalties. The person may also be able to claim employment rights, such as holiday pay, going back years.
💡 Good to know: It is the reality that counts, so keep evidence of how the arrangement actually works, not just a contract that says self-employed. HMRC's online status tool (CEST) Check employment status for tax (CEST) - GOV.UK gives a useful indication, but check with us before relying on it, and run any new arrangement past us before terms are agreed.
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