How to Pay Contractors in the UK: Complete 2025 Guide

Why This Guide Is Different

Paying UK contractors is simpler than paying US contractors in some ways (no 1099 forms), but more complex in others (IR35 compliance). This guide covers everything you need to know whether you're a UK business paying UK contractors, or an international business paying contractors in the UK.

Most guides focus on US tax rules or international EOR platforms. This guide is specifically for businesses working with UK-based independent contractors and self-employed professionals.

Payment Methods Compared

Recommended: BACS for UK, Wise for International

If you're a UK business paying UK contractors: Use BACS or Faster Payments through your UK bank. It's free, instant to 2 hours, and contractors receive GBP directly in their UK bank account.

If you're an international business paying UK contractors: Use Wise. You'll get mid-market exchange rates (3-4% better than PayPal or banks) and low fixed fees (£2-5 per transfer). Contractors receive GBP in 1-2 days.

How to set up Wise payments to UK contractors:

1. Create a Wise business account (free)
2. Get contractor's UK bank details (sort code and account number)
3. Send GBP to their UK bank account
4. Wise converts at mid-market rate if you're paying from USD, EUR, etc.
5. Contractor receives GBP in 1-2 business days

Understanding IR35 (Off-Payroll Working Rules)

IR35 is the biggest compliance concern when paying UK contractors. It's HMRC's way of preventing "disguised employment"—where someone is effectively an employee but works through a limited company to avoid taxes.

Who IR35 applies to:

• UK businesses (medium and large) paying UK contractors through limited companies
• Public sector organizations paying any UK contractors
• Does NOT apply if you're paying a sole trader or self-employed individual directly
• Does NOT apply if you're a small UK business (less than £10.2M turnover, 50 employees, £5.1M balance sheet)

How IR35 works:

If you're a medium/large UK business, YOU are responsible for determining if the contractor would be an employee if not for their limited company. If yes, IR35 applies and you must:

1. Deduct income tax and National Insurance from payments
2. Pay employer National Insurance contributions
3. Provide a Status Determination Statement (SDS) to the contractor

Key IR35 factors:

• Control: Does the contractor control how, when, and where they work?
• Substitution: Can they send someone else to do the work?
• Mutuality of obligation: Are you obligated to provide work and are they obligated to accept it?
• Financial risk: Do they risk their own money?
• Part and parcel: Are they integrated into your organization like an employee?

Pro tip: Use HMRC's Check Employment Status for Tax (CEST) tool to assess IR35 status. It's not legally binding, but HMRC will usually accept its determination.

Tax and Compliance Requirements

What You Need from UK Contractors

Unlike US contractors, UK contractors don't need to provide tax forms like W-9. They're responsible for their own self-assessment tax returns. However, you should collect:

• Invoices: Contractors should provide invoices for all work completed
• VAT registration: If contractor is VAT-registered (turnover over £90,000), they'll charge 20% VAT on invoices
• Company details: If they work through a limited company, get company name and registration number
• Bank details: UK sort code and account number for BACS payments

What You Need to Keep

HMRC requires you to keep records for 6 years. You should maintain:

• All contractor invoices
• Proof of payment (bank statements, Wise receipts)
• Contracts or statements of work
• IR35 Status Determination Statements (if applicable)
• Correspondence about work arrangements

Pro tip: Kontrable automatically stores all invoices, contracts, and payment records in one place, making HMRC audits stress-free.

Common Mistakes (And How to Avoid Them)

Mistake 1: Ignoring IR35

Problem: You're a medium/large UK business and didn't assess IR35 status. HMRC audits you and determines the contractor should have been inside IR35. You owe back taxes, National Insurance, penalties, and interest.

Solution: Use HMRC's CEST tool for every contractor engagement. Document your reasoning. Provide Status Determination Statements. If in doubt, treat as inside IR35—it's safer.

Mistake 2: Paying Without Invoices

Problem: You pay contractors based on verbal agreements or Slack messages. Come tax time, you have no proper documentation for expenses.

Solution: Require invoices for all contractor payments. Kontrable makes this automatic—contractors can't get paid without submitting a proper invoice.

Mistake 3: Using PayPal for Currency Conversion

Problem: You're a US business paying UK contractors via PayPal. PayPal's exchange rate is 3-4% worse than mid-market. For a $5,000 payment, you lose $150-200 to bad exchange rates.

Solution: Use Wise for international payments. You get mid-market rates and save 3-4% on every payment. For $50,000/year in contractor payments, that's $1,500-2,000 saved.

Mistake 4: Not Keeping Records for 6 Years

Problem: HMRC audits you 4 years after you paid a contractor. You can't find the invoices or proof of payment. HMRC disallows the expense.

Solution: Use a system that automatically stores all contractor documents for 6+ years. Kontrable keeps everything organized and accessible forever.

Tools for UK Contractor Management

For payments:

• BACS/Faster Payments via your UK bank (free for UK-to-UK)
• Wise (best for international to UK, £2-5 per transfer)
• PayPal (convenient but higher fees)

For compliance and management:

• Xero or QuickBooks (accounting software, £10-30/month, not contractor-specific)
• Spreadsheets (free but error-prone and time-consuming)
• Deel or Remote.com (£35-75 per contractor per month, built for EOR not contractors)

For contractor operations:

Kontrable is built specifically for managing independent contractors, including UK contractors:

• Invoice management and approval workflows
• Payment tracking (works with BACS, Wise, PayPal, any payment method)
• Contract storage and e-signatures
• IR35 Status Determination Statement storage
• 6-year record retention (HMRC compliant)
• Project and milestone tracking

Pricing: $99/month (£78/month) for up to 25 contractors. No per-contractor fees. Early access users get 50% off for 6 months.

Frequently Asked Questions

Get Started

Managing UK contractors?

1. Assess IR35 status using HMRC's CEST tool (if applicable)
2. Set up BACS payments (UK) or Wise (international)
3. Require invoices for all payments
4. Keep records for 6 years

Want to automate this?

Kontrable launches Q1 2026 with contractor management tools built for UK compliance. Invoice workflows, payment tracking, IR35 documentation, 6-year record retention, and contract storage. $99/month for up to 25 contractors.