Converting a UK contractor to an employee without a UK entity

Be clear what is changing

Moving someone from a contract for their services to a contract of employment changes who is responsible for what. In employment law, a person's employment status helps decide their rights and their employer's responsibilities. A person may have a different employment status in tax law. Courts and tribunals can make final decisions on employment status. Acas can advise on employment status, and their helpline is 0300 123 1100.

You may have heard of IR35, the off-payroll working rules. They make sure that a worker, sometimes known as a contractor, pays broadly the same income tax and National Insurance as an employee would, where they work through their own company or another intermediary. Once the person is your employee, the payroll route you choose decides how their tax and National Insurance are paid.

Three ways to employ them with no UK company

Which one fits depends mainly on where your company is based.

• DPNI. The employee sets up a DPNI and pays both their income tax and their employee National Insurance to HMRC under one PAYE reference. HMRC's DPNI guidance includes employees of an overseas employer that has no UK address it pays wages from.
• NI-only. When someone works in the UK for an employer based in the EU and UK National Insurance is due, it is due on both sides, the employee's and the employer's, so the scheme is an NI-only scheme in the employer's name and not a DPNI or DCNI.
• Your own UK PAYE. A company with no UK presence doesn't have to run UK PAYE, but it can choose to run it in its own name.

One exception: if the person will work for a UK business, such as your UK client, that business may have to run PAYE on their pay. We will ask HMRC for the scheme that fits your facts, and they may suggest a different one once they have the full facts.

The steps, in order

1. Agree the terms and put them in writing. An employer must give a new employee the main written statement of their terms on their first day, and the wider written statement within two months of the start of employment.
2. Check their right to work. You must check that someone is allowed to work for you in the UK before you employ them, even if they have worked for you as a contractor.
3. Pick the changeover date. Decide which day their last invoice covers and which day their first pay as an employee starts, so that no period is paid twice or missed.
4. Register the scheme. We'd allow four to eight weeks for HMRC to set the scheme up, and that's our own estimate, not a figure from HMRC. If pay starts before the scheme is in place, payroll still runs every payday and is reported to HMRC late once the scheme exists.
5. Collect their starter details. If they don't have a recent P45, for example because they have been self-employed, they fill in a starter checklist instead.
6. Insurance and pension from day one. You must have employers' liability insurance from the day you become an employer, unless the only person you employ is based outside England, Scotland and Wales, and you can be fined £2,500 for every day you're not properly insured. The workplace pension (auto-enrolment) duties also start on the employee's start date, not when HMRC open the scheme.
7. Run the first payday. From here it is a normal payroll: payslips, the reports to HMRC and the pension contributions each pay period.

What it costs to have it run for you

A DPNI costs £157 a month. An NI-only scheme costs £157 a month for one employee, and £150 a month plus £7 per payslip for two or more. Setup is £750, or £500 if you go ahead within two weeks of your quote, and no VAT is added. A UK PAYE scheme in the company's own name starts at £225 a month plus £8 per payslip, and setting it up costs £350.

When the scheme is in the employee's own name, the employee is our client and pays our fees. An employer that wants to cover the cost can add the amount to the employee's pay, and the employee then pays us. Our work on the workplace pension is included in the monthly fee, and we never charge extra for it.

If you would rather not become the employer at all, an Employer of Record is the other option. Our guide to when an EOR is the right answer sets out when it fits.

Contractor to employee: common questions

Can an overseas company employ its UK contractor without a UK entity?

Yes. A company with no UK presence doesn't have to run UK PAYE, but it can choose to run it in its own name. HMRC's direct schemes are the other route: a DPNI, set up in the employee's name, or an NI-only scheme in the employer's name where the employer is based in the EU, the EEA or Switzerland. We will ask HMRC for the scheme that fits your facts, and they may suggest a different one once they have the full facts.

Who decides whether someone is an employee?

Courts and tribunals can make final decisions on employment status. A person may have a different employment status in tax law. Acas can advise on employment status, and their helpline is 0300 123 1100.

Does a former contractor need a P45 to start on the payroll?

No. If they don't have a recent P45, for example because they have been self-employed, they fill in a starter checklist instead.

When do the pension duties start?

On the employee's start date, not when HMRC open the scheme. You must enrol and contribute for staff aged between 22 and State Pension age who earn at least £10,000 a year and normally work in the UK.

Read next

• Pay a UK employee from abroad, the routes in plain terms.
• Employer of Record alternative in the UK, when you need one and when you don't.
• Employer of Record cost vs your own payroll, with an interactive comparison.
• When an Employer of Record is the right answer, the cases where it fits.
• Switch from an EOR to your own UK payroll, how the move works.
• Employer of Record UK for US companies, cost and the direct route.
• Employer of Record UK: the complete guide, every EOR guide in one place.