What’s the difference between an employee and a subcontractor?

If you run a small construction or property business, you’ve probably wondered whether someone should be on the books as an employee or paid as a subcontractor. And yes - it matters for tax, for your wallet, and for keeping HMRC happy.

This is the shorter, simpler version. No jargon. No scrolling for miles.

Employee vs subcontractor in plain English

An employee is part of your team. You tell them when to work, how to work and what they’ll be doing. You provide tools, gear, materials - the lot.

A subcontractor runs their own small business. They quote for jobs, pick their hours, provide their own tools, and can often work for other clients at the same time.

A useful rule of thumb:

If they look and feel like staff, HMRC will usually treat them like staff - whatever you call them.

How is each one taxed?

Employees

Paid through PAYE payroll. You deduct:

• Income Tax
• Employee National Insurance
  …and you pay Employer’s NIC on top.

They don’t deal with CIS at all.

Subcontractors

If they’re a sole trader or partnership: they’re self‑employed, do their own Self Assessment, and pay tax on their profits. If they’re a limited company, the company pays Corporation Tax and the director may file a personal tax return too.

If the work is construction, you may need to deduct CIS (usually 20%) from their labour. This isn’t extra tax - it’s just an advance payment towards their yearly bill.

Do they need to do Self Assessment?

Employees: Not normally. Only if they’ve got other taxable income (like rental income or a side business) or if HMRC asks.

Subcontractors: Almost always. CIS deductions go onto their tax return so HMRC can work out their final bill or refund.

Do both get CIS deducted?

No.

• Employees → PAYE only, never CIS.
• Subcontractors → CIS applies if the job is construction and you’re a CIS contractor.

Some subcontractors can apply for Gross Payment Status, meaning you pay them in full with no CIS withheld — but they still sort their own tax.

Is a subcontractor an employee?

Sometimes people who look like subcontractors are actually employees in HMRC’s eyes — especially if they:

• work only for you
• work set hours
• use your equipment
• have been with you for ages

If HMRC decides they’re really an employee, you may be on the hook for the unpaid tax and NIC.

Is a subcontractor a sole trader?

Often, yes - but not always. A subcontractor can be:

• a sole trader
• a partner
• or a limited company

“Subcontractor” describes how you hire them. “Sole trader” or “limited company” describes their business structure.

Quick warning signs to watch

Only 3 simple ones this time:

• They work full‑time for you and no one else
• They look and behave like your PAYE staff
• They’ve been “self‑employed” for years but nothing about the job feels independent

These are the cases HMRC loves to challenge.

Need help deciding?

If you’re unsure whether someone should be PAYE or CIS, or you think you may have misclassified a worker, get advice before HMRC comes calling.

Call Blue Rocket Accounting to discuss payroll, CIS and employment status for your workers.