In April 2025, the threshold at which employers start paying NICs (the secondary threshold) was reduced from £9,100 to £5,000 per year.
At the same time however, to help small businesses offset the increased NIC costs, the Employment Allowance (the employers’ equivalent to the personal tax allowance), which FSB co-created with the Government and which helps eligible employers reduce their NIC liability, rose from £5,000 to £10,500, and the £100,000 eligibility threshold was removed.
Rising wage bills, increased National Insurance costs, and a rise in both the National Minimum Wage (which applies to workers between school leaving age and aged under 21 years) and the National Living Wage (which applies to workers aged 21 and over) have led to some media reports suggesting that employers may be considering alternatives to the traditional employment model. One such option, is to hire self-employed contractors/freelancers for certain functions instead of directly employing staff.
However, what are the advantages and disadvantages of taking on contractors versus directly employed staff?
The advantages of hiring self-employed staff.
1. Potential lower overall costs
Unlike employees, self-employed workers cover their own tax and National Insurance contributions. You also don’t have to provide statutory benefits such as holiday pay, sick pay, pension contributions, or parental leave. This means that, potentially at least, staff costs might be lower (depending on the contractor’s rate).
2. Flexibility in staffing levels
Contractors can be brought in on a short-term or project-specific basis. This means you can more flexibly increase your workforce when demand spikes and scale back during quieter periods without the cost of keeping staff on the payroll. An alternative to using self-employed staff when flexibility is required is engaging casual workers or zero-hour employees (typically for lower-skilled work) who are paid through the payroll but who are engaged on contracts where there is no requirement to provide work.
3. Reduced administrative burden
There’s no need to operate PAYE or manage employee-related HR/management processes for self-employed staff. Invoicing replaces payroll, freeing up time spent managing employees and on payroll and employment administration.
4. Access to specialist skills
Contractors often have niche expertise that you might not need on a permanent basis. Bringing in a specialist can help you deliver high-quality work without committing to a permanent salary through the payroll.
5. No redundancy costs or unfair dismissal
When the work ends, the relationship can simply conclude based on the terms set out in the contract. There’s no statutory redundancy or dismissal process, notice period, or consultation requirement. Nor is there is a risk of unfair dismissal claims (in the cases of genuine self-employment).
The disadvantages you need to consider:
1. Less control over work
Self-employed workers have the right to decide how and when they work (within agreed deadlines and service levels set out in the contract). This can make it harder to enforce specific procedures, working times, or company culture.
2. The IR35 and employment status risk
HMRC applies strict tests to decide whether someone is genuinely self-employed for tax purposes. IR35 status determines whether the individual is treated as an employee or contractor for tax purposes. If you treat a contractor like an employee but call them self-employed, you could face large backdated tax bills, penalties, and interest.
The individual may also challenge their worker status in an employment tribunal.
3. Lower loyalty and retention
Self-employed workers may take on other clients, including competitors and may not prioritise your work in the same way an employee would.
4. Higher day rates or hourly rates
Contractors often charge more per hour or day than employees to compensate for the lack of job security and statutory benefits (such as holiday pay, sick pay and contractual employee benefits). The total cost can sometimes be higher than employing someone directly, particularly for long-term arrangements.
5. Potential confidentiality issues
Due to the fact that contractors/freelancers can work for multiple clients, you’ll need suitably worded contracts to protect sensitive business information and avoid conflicts of interest. In reality, these provisions can be difficult and costly to enforce where the contractor does not abide by them.
6. Limited team integration
Self-employed freelancers/contractors may be less involved in company culture, harder to manage closely, and less invested in the business’s goals long-term.
No one size fits all when it comes to hiring preferences. For many UK small businesses, the most effective approach may be a blended workforce. This may involve directly employing a core team of employees, while bringing in self-employed contractors for when specialist skills are needed and/or casual or zero-hour workers to cover periods when work demand fluctuates.
The top-rated way that small business owners account for an increase in their wage bill continues to be taking lower profits/cutting costs elsewhere if possible. Some employers may find alternative ways to cut business costs such as through different ways of working, using technology, outsourcing and other methods of delivering their services and products.
FSB members can find template employment contracts, contracts for services (for contracting with self-employed staff (such as contractors, consultants and freelancers)) and zero-hour employee and casual worker template contracts and guidance notes on the FSB Legal and Business Hub.