Working on a Self-Employed Basis
Correctly classifying whether someone is an employee or is self-employed is critical for UK small businesses. This classification determines legal rights, tax responsibilities, and day-to-day control. In this article, we explain how working hours, scope of work, and billing differ between employees and those operating under independent contractor agreements.
Benefits of Freelance Arrangements — for Both Sides
Engaging someone who is genuinely working for you on a self-employed basis offers practical advantages for both the business and self employed workers.
For the Business
Reduced Administration: Management of independent contractors can often be much simpler than employees, due to the fact that self-employed individuals are responsible for virtually all administration of their own engagements. For companies, the self-employed contractor is a vendor instead of an employee.
Cost Efficiency: Self-employed contractors manage their own tax and National Insurance obligations. There’s no need to contribute to pension schemes, holiday or sick pay, or sick leave—reducing ongoing personnel costs.
Other financial benefits: where the self-employed individual is treated as a vendor, the financial accounts show the expense as services instead of personnel, thereby lowering headcount for the company.
Flexibility: The business can engage contractors on a project-by-project basis without long-term commitment. This enables rapid scaling up (or down) depending on business needs—ideal for early-stage companies or seasonal demands.
Specialist Skills: Many self-employed professionals offer niche expertise that may not be available in-house. Bringing in genuinely self employed professionals allows you to access high-level skills without permanent overheads.
Streamlined Onboarding: There’s typically less internal admin involved. Clear deliverables, defined timelines, and milestone-based payment structures allow for efficient project management.
For the Contractor
Freedom and Autonomy: Self-employed individuals enjoy control over how and when they work. This often leads to higher job satisfaction for self employed workers and a better work-life balance.
Diverse Opportunities: Contractors can work with multiple clients across sectors, expanding their network and increasing earning potential.
Tax Deductions: Business expenses may be deductible under HMRC rules, further improving net income.
Summary
When structured properly, working for someone on a self-employed basis fosters mutually beneficial relationships—driving value and flexibility without the complexity of employment.
Why Classification Matters: Risks of Misstating a Self‑Employed Relationship
When an individual seeks to work on a self‑employed basis, misclassifying that person as an independent contractor when they are in fact an employee can expose your business to serious legal, financial and reputational risks. Whether you are seeking to work for a company but retain self-employed status, or you are a company hoping to reduce the number of employees in your business, it is important to review each situation individually. Contact the Digital Legal Forum to review your goals and determine the optimal path forward.
Tax and National Insurance liabilities
Self employed people must manage their own tax obligations. They are responsible for completing a self assessment tax return each year to report their income and allowable expenses. Through this process, they calculate and pay income tax as well as Class 2 and Class 4 National Insurance contributions. It is essential for self employed individuals to keep accurate financial records throughout the year to ensure they pay tax correctly and on time. This financial independence is a key feature of genuine self-employment arrangements.
Conversely, if HMRC determines that a person engaged as self‑employed should legally have been treated as an employee, the company may be liable for unpaid PAYE income tax and employer National Insurance contributions. The company may also be required to correct tax filings retrospectively and pay arrears, effectively erasing any perceived administrative and financial benefits of the contract arrangement.
Employment law claims and statutory entitlements
If a company engages a worker who is reclassified to be an employee, the individual becomes entitled to a range of employment rights—including paid holiday, sick pay, National Minimum Wage, rest breaks and potential unfair dismissal protections. Misclassified workers may bring claims before an employment tribunal to recover back pay, holiday pay and compensation. In the UK, tribunals have wide latitude to look beyond contract labels and assess the true working relationship.
Liability for unpaid benefits
Employers may be required to reimburse or compensate for benefits the individual missed out on—such as pensions auto-enrolment contributions, health insurance or redundancy pay. HMRC and The Pensions Regulator may both impose financial penalties or require retroactive payment.
Financial penalties and reputation harm
Penalties aren’t limited to back pay or tax arrears. Companies face administrative fines, interest charges and, in serious or deliberate cases, criminal sanctions—particularly if there’s evidence that misclassification was intentional. Ongoing investigations or tribunal claims can also damage your reputation and disrupt operations, leading to loss of trust from both contractors and clients.
Operational and audit risks
Misclassification often triggers regulatory audits by HMRC, The Pensions Regulator, and potentially others. These can consume time, resources and may lead to further compliance investigations. Written contracts labelled ‘self‑employed’ may not be sufficient unless they reflect the actual working practices .
To ensure that your self‑employed basis is correctly classified, use thorough, clear documentation and assess the real relationship. Your agreements should spell out the nature of the arrangement: project scope, fees, deliverables, termination rights and lack of employee-like or management supervision or mutuality of obligations.
How to Set up Working hours, Scope of Work, and Billing in Self-Employed Contractor Agreements
As explained above, every situation is different, and the UK regulators are able to look at the factual circumstances in each case to determine the nature of the relationship. It is therefore important to thoroughly investigate and review your situation if you have any doubt about your practices or the status of an individual. Below are a few general guidelines on how to set up working hours, scope of work and billing when working on a self-employed basis.
Scope of Work and Day-to-Day Control
A major difference between contractors and employees lies in how much control a business has over the person’s work. Working for someone on a self-employed basis means you decide how, when, and with what tools your tasks are completed. Self-employed individuals are hired to provide services and deliver results, not to be supervised in real time. They maintain IP rights over their work (unless they contractually agree otherwise) and manage any other tasks they take on separately.
If a contractor receives day-to-day instructions or follows internal procedures like an employee, HMRC or the courts may decide they are a ‘disguised employee’. This could lead to reclassification and potential financial penalties. Such reclassification can also affect ownership of intellectual property and the distribution of employment benefits.
Employees, by contrast, are under direct supervision. Their responsibilities and tasks are controlled by the employer, and they generally work within set roles and structures. Their contracts typically include clauses around confidential information, trade secrets, and intellectual property ownership.
Working Hours
Working for someone on a self-employed basis means that hours are agreed with the client and are typically more flexible—suited to project timelines, other client commitments, or personal availability. While this allows for greater freedom, it also places the responsibility on the contractor to manage deliverables and comply with their agreement independently.
In contrast, employers and employees are bound by the Working Time Regulations 1998. They typically work no more than 48 hours a week unless they opt out, and are entitled to daily breaks, weekly rest, and paid holidays. Their work is structured and often includes requirements around communication and availability.
Contractors are not subject to these regulations. They agree working hours directly with clients, often choosing to work evenings or weekends. This flexibility allows them to juggle multiple projects or work outside of traditional office hours. However, they don’t have the same protections or entitlements, and must manage expenses incurred for tax purposes , payment terms, and delivery schedules independently.
This freedom can be appealing to many professionals—but it also places responsibility on contractors to manage their own time and deliverables effectively, while adhering to their independent contractor agreements.
Billing and Payment Terms
A person working for someone on a self-employed basis, often running their own business, handles their own invoicing and is paid in line with the contractual agreement. Common billing methods include:
Hourly or daily rates for ongoing services
Fixed project fees for defined deliverables
Retainers for regular work
A common issue for self-employed individuals is collection of payments, since they are not paid a regular salary or wage. If you are a self-employed contractor and experiencing collections issues, contact the Digital Legal Forum to get advice on how to structure your contracts and collect outstanding payments.
Clear contract terms are essential. Independent contractor contract template agreements should cover VAT treatment (if applicable), payment timeframes, and how expenses will be dealt with.
Contractual Arrangement
As explained above, there must be a clear contractual agreement that sets out terms and conditions for a services engagement, including services scope, deliverables, termination rights, responsibility for equipment and insurance, and other issues. A tailored independent contractor agreement helps define the relationship and protect both parties.
Exclusivity of Work
Agreeing that the self-employed individual is engaged on a non-exclusive basis can be a key factor. Ideally, the individual should have wide latitude in accepting other work from a variety of clients. Confidentiality obligations, as explained in the NDA article, can still be enforced.
FAQs on Self-Employed Status
Freelancing or working on a self-employed basis offers flexibility and exciting opportunities, especially as self employed individuals run their own businesses, but it also brings the crucial need for clear and effective contracts. At the Digital Legal Forum, we understand how important it is to protect both genuinely self employed freelancers and clients through well-drafted agreements. Below, we answer some commonly asked questions about freelance contracts to help you get started with confidence.
Frequently Asked Questions
How do I write a freelance contract?
Writing a freelance contract may seem daunting, but it’s essential for setting clear expectations and protecting both parties. Here are the key steps:
- 1. Identify the Parties
- 2. Define the Scope of Work
- 3. Set Deliverables and Deadlines
- 4. Agree on Payment Terms
- 5. Address Intellectual Property Rights and confidentiality
- 6. Define how either party can end the contract and any notice periods.
- 7. Outline how disagreements will be handled, whether through mediation, arbitration, or court.
- 8. Signing Both parties should sign and date the contract to make it legally binding.
The example DLF Freelance Agreement template provides all of the above language - download it here.
What Are the Types of Freelance Contracts in the UK?
Freelancers in the UK generally encounter these common contract types:
Fixed-Price Contracts
A set fee is agreed upon upfront for the entire project. Suitable for well-defined tasks.
Hourly Rate Contracts
Payment is based on hours worked, often tracked via timesheets or invoices.
Retainer Contracts
The freelancer is paid a regular fee to provide ongoing services, often on-demand.
Project-Based Contracts
Similar to fixed-price but with more flexibility around deliverables and timelines.
Choosing the right contract depends on your working style, the client relationship, and the nature of the project. To download an freelance contract, visit a reliable legal website such as Digital Legal Forum, which provides professionally drafted contract templates. Choose the type of agreement that suits your situation, download it in a format like Word or PDF, and then customise it by filling in the required details. Make sure the contract covers all necessary terms such as job role, payment terms, notice periods, and intellectual property. Always review the document or seek legal advice before having both parties sign.
What are employment rights?
'Employment rights' are statutory rights that are available to employment status workers. Regular employees have legal protections against wrongul dismissal, unlawful discrimination, poor working conditions and other rights that are either not available to, or are much more limited for, sole traders.
Some of the types of employment contracts in the UK are: (1) permanent contracts, used for ongoing roles with no end date; (2) fixed-term contracts, which end on a specific date or after a task is completed; (3) zero-hour contracts, where work hours vary with no guaranteed minimum. Each type of contract has different implications for employment rights like holiday pay, sick pay, and tax. Selecting the right contract is vital to match the business need and legal obligations.
Final Thoughts
Understanding the difference between employees and contractors helps you build a compliant and effective workforce. Each role serves a purpose, but they come with different legal and operational responsibilities. Whether you’re hiring directly, working with an agency, or using an umbrella company, clarity is key.
For clear, affordable legal documents, including employment contract samples and independent contractor agreement templates, visit the Digital Legal Forum. Our resources are designed to help UK small businesses handle legal matters independently—without large, unexpected costs.