Subcontractor vs Employee: The Real Tax Cost 2026/27

When a small business needs extra hands, the choice between taking on an employee and paying a subcontractor is partly a tax question. The subcontractor often looks cheaper on paper, but employer National Insurance, holiday pay and the risk of getting employment status wrong all change the real cost. Here is how the numbers stack up for 2026/27.

The extra costs of an employee

If you take someone on as an employee, you carry costs the worker never sees:

• Employer (secondary) Class 1 National Insurance at 15% on pay above GBP 5,000 per year.
• Automatic enrolment pension contributions, typically a minimum 3% employer contribution.
• Holiday pay, statutory sick pay and other employment rights.
• Payroll administration and reporting under PAYE.

The Employment Allowance can offset up to GBP 10,500 of your employer NI bill if you qualify, which helps smaller employers a lot.

The apparent saving with a subcontractor

A genuine subcontractor invoices you for their work and handles their own tax. You pay no employer NI, no pension, no holiday pay. You simply pay the invoice. That is why the headline cost can look 20% to 30% lower than employing someone for the same work.

But there is a major condition: the person must genuinely be self-employed in their working relationship with you.

Worked example: GBP 35,000 of work

Compare paying a worker GBP 35,000 as an employee against paying a subcontractor GBP 35,000 in fees.

Employee:

• Gross salary: GBP 35,000.
• Employer NI: 15% of (GBP 35,000 minus GBP 5,000) = GBP 4,500, though the Employment Allowance may cover this for a qualifying employer.
• Employer pension at 3% of qualifying earnings: roughly GBP 900.
• Total employer cost without Employment Allowance: about GBP 40,400.

Subcontractor:

• Invoices total: GBP 35,000.
• Employer NI: nil.
• Pension and holiday pay: nil.
• Total cost: GBP 35,000.

On the face of it the subcontractor saves around GBP 5,400, or GBP 900 if the Employment Allowance wipes out the employer NI. But that saving only holds if the status is genuinely self-employed.

The status risk

Employment status is decided by the reality of the relationship, not the label on the contract. HMRC weighs factors such as:

• Control: do you tell the worker how, when and where to work?
• Personal service: must they do the job themselves, or can they send a substitute?
• Financial risk: do they risk their own money, provide their own tools and correct defects at their own cost?
• Mutuality of obligation: are you obliged to offer work and they to accept it?

If the answers point to employment, HMRC can treat the arrangement as employment regardless of the contract, and pursue you for the PAYE and employer NI that should have been paid. That can turn an apparent saving into a sizeable bill plus interest and penalties.

A checklist before you decide

• Is the worker genuinely in business on their own account, with other clients?
• Do they provide their own equipment and carry their own insurance?
• Can they send a substitute to do the work?
• Are you comfortable that the relationship is project-based rather than ongoing and controlled?
• If in doubt, use HMRC's check employment status tool before you agree terms.

The decision is rarely just about cost. Employees give you more control and continuity; genuine subcontractors give flexibility and lower overheads but only when the status is clear.

To model the full employer cost of a salary including National Insurance and pension, use the calchub.uk employer cost and take-home calculators, and run the check employment status for tax tool on gov.uk before you take anyone on.