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Transitioning a Contractor to an Employee in the UK

The trend of using contractors in the ‘gig’ economy does not always work out for either the client-company or the worker, and if your company is using contractors you may wonder how to handle any potential transition to formal employment.  Sometimes the lure of independence wears off for the contractor, and they tire of the need to manage their own work life and finances, without the support of a true employer.

At times there may also be business reasons for the company to transition the contractor to an employee role, and that means changing the structure of compensation and work scope based on differences in taxes, statutory contributions and leave.  So, how do you begin to initiate a successful transition?

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How to Transition a Contractor to an Employee in the UK

If you are transitioning a contractor in the UK, you will have to shift them into a position that carries all of the employment rights and labor protections for employees.  That means making a formal job offer, drafting an employment contract and including them in benefit and pension programs offered to UK employees.

Naturally, they will expect to earn similar compensation, but keep in mind you are now providing their statutory contributions, insurance and paid holidays which were previously their responsibility when self-employed.

You will also be offering job security, as well as notice periods and severance in the event of termination, so these factors all have to be considered as you transfer their self-employment contract into an equivalent employment agreement.  Once you do that, you are ready to put them on your payroll as an employee.

Working Out Your New Employee’s Tax Code in the UK

Once you have the employee on the payroll, you will have to take some steps to meet the tax code rules.  The way you do this is fill out Form P45 which lists all of the employee’s details that will allow assignment of the correct tax code for withholding in the UK.

Case Example:

We had a client with a contractor transitioning to an employee in the UK, and the worker did not have a current P45 because they used a different form as a self-employed contractor, and had not been an employee for some time.  They did have a P46 (the older version) and wondered if that would be acceptable.

We told them that the P46 could no longer be used as it was outdated, and that a P45 was required of a new employee.  They were instructed to have the employee fill out the Starter Checklist online and that would tell them the correct tax code to use for withholding and tax rates.

Shield GEO Solution

If you are facing the prospect of transitioning a contractor to an employee in the UK, you might be wondering just how to approach it, especially if you are trying to manage it from abroad.  Here are some of the questions that might come up:

  • Where can you find the right information and support to make sure that all of the UK employment laws are met for your new employee?
  • Who handles the tax calculation, withholding and reporting?
  • What if you don’t have a payroll set up in the UK yet?

Shield GEO UK offers you a one-stop solution for all of your UK employment needs, using our own employer of record (EOR) with no third parties involved, to legally employ your worker in the UK.  If you were using a contractor before, you might not have a UK payroll set up, but we can take care of that for you with our EOR, along with all of the tax withholding, filing and reporting requirements.

This means that your new employee will be onboard quickly and if full compliance with all UK laws, and you will only manage their daily work as usual.  We make international employment simple.

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