HiringLast reviewed 27 August 2026· 8 min read

Your first hire: employee, contractor or freelancer?

How employment status actually gets decided, what the 2026/27 employer NIC position means for your budget, and the questions to answer before you write anyone a contract.

The first hire decision is usually framed as a cost question. It is really a control and continuity question, and the tax treatment follows from the answer rather than the other way round.

Key takeaways

Status is determined by how the relationship actually works, not by what the contract calls it.
HMRC's Check Employment Status for Tax (CEST) tool can be used to assess status for tax.
Employer Class 1 NIC is 15% above the secondary threshold for 2026/27, budget for it.
Choosing contractor status purely to reduce cost is a risk, not a strategy.
Write down who controls the work, who bears the risk, and whether substitution is genuine.

Status is about reality, not labels

GOV.UK is explicit that someone is self-employed based on the substance of the arrangement, whether they control how and when the work is done, whether they can send a substitute, whether they bear financial risk, whether they work for others. Calling a contract a 'contractor agreement' does not settle the question.

HMRC's Employment Status Manual sets out how those factors are weighed. If most of the indicators point at employment, HMRC will treat the engagement as employment regardless of paperwork.

The money side

For an employee you carry employer National Insurance contributions on top of salary, the employer Class 1 rate is 15% above the secondary threshold for 2026/27, plus pension auto-enrolment duties, holiday, sick pay and notice obligations. That is not a reason to avoid employing someone; it is a reason to model the full cost before you offer a number.

Contractors invoice you, usually at a higher headline rate, and carry their own tax. The saving is smaller than it looks once you account for onboarding, context loss and the work you cannot direct.

Decision questions

Answer these honestly before you choose a structure.

Do you need someone available on your schedule, or an outcome delivered by a deadline?
Will you tell them how to do the work, or only what the result should be?
Is the need permanent, or a defined project with an end?
Could they genuinely send a competent substitute and would you accept that?
Are they taking any financial risk, fixing defects at their own cost, providing their own kit?
Can you afford the fully loaded employment cost for at least twelve months?

Before you sign anything

Run CEST and keep the output. Write a contract that matches how you will actually work together, then work that way. Review the arrangement if the relationship drifts, a contractor who has become a de facto team member over eighteen months is the classic problem case.

What to ask other founders

Guidance tells you the rules. Other founders tell you what actually happened. These are worth asking as a structured Advice or Critique request.

What did your first hire actually cost, fully loaded, in year one?
Did you start someone as a contractor and later convert them? How did that go?
What did you get wrong in the first three months?

Ask for advice

Sources & further reading

General information only, not tax or employment law advice. Take professional advice on your specific engagement.