How to Convert a Contractor to an Employee
Convert a contractor to an employee by agreeing new employment terms, issuing an employment contract, setting up PAYE and auto-enrolment pension, terminating the contractor agreement, and ensuring a clean transition of status with HMRC.
Last updated: February 2025
Step-by-Step Guide
Assess the current arrangement and IR35 status
Review whether the contractor is already caught by IR35 (off-payroll working rules). If so, conversion formalises the true position.
- •Use HMRC's CEST tool to check the current status.
Agree employment terms
Negotiate salary, benefits, holiday, pension, and other employment terms. The contractor may expect equivalent or higher total compensation to offset lost tax advantages.
- •Factor in employer NI, pension contributions, and holiday pay when calculating costs.
Issue an employment contract
Draft a full employment contract including all section 1 written statement requirements. Set a clear start date for employment.
- •Agree whether previous contractor service counts for any employment rights.
Set up PAYE and pension
Register the new employee on your PAYE scheme and enrol them in your auto-enrolment pension. Issue a starter checklist for tax code purposes.
- •The employee may need to submit a P45 from their personal company or a starter declaration.
Terminate the contractor agreement
Formally end the contractor agreement, settle any outstanding invoices, and confirm the transition date in writing.
- •Ensure IP created during the contractor period is properly assigned.
Legal Requirements
The conversion must comply with the Employment Rights Act 1996, PAYE regulations, auto-enrolment pension duties under the Pensions Act 2008, and the off-payroll working rules (IR35) in Chapter 10 of ITEPA 2003. The new employee gains statutory employment rights from day one including the right to a written statement, rest breaks, and protection from discrimination.
Common Mistakes
Template / Example
When to Get a Solicitor
If the contractor has been working for an extended period and there are questions about retrospective employment status, or if there are complex IP or equity arrangements to unwind.
FAQ
Does a contractor's previous service count for employment rights?
Not automatically. Continuity of employment usually starts on the date employment begins. However, if a tribunal later finds the contractor was always an employee, the full period may count.
What if the contractor does not want to become an employee?
You cannot force conversion. However, if the arrangement is caught by IR35, you may need to apply off-payroll working rules or end the engagement.
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Get Started FreeThis is guidance, not legal advice. Consult a solicitor for complex matters.
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