Freelancer Payment Guide for UK Businesses

The gig economy is expanding at an astronomical pace. It’s becoming quite apparent that the future workforce will consist of freelancers. Remote work is not only a perk but an essential part of running a safe and effective business. 

Freelancing is no longer a fad.

Organisations must be more open to workforce flexibility. This includes hiring a freelancer’s contracted services, whether on a short-term or long-term basis. 

Who is a Freelancer?

A freelancer is an individual who is self-employed and offers contracted services, typically on a short-term basis. With the rise of the gig economy, many businesses are hiring freelancers for long-term commitments. 

Freelancers usually work remotely on multiple projects at their own pace and on their own schedule. They typically set an hourly rate or charge a client based on various parameters, such as project length, time, scope, etc.

Highly sought freelance services usually involve:

• Accounting
• Software Development
• Consulting
• Multimedia Production
• Marketing and Social Media Management

Individual freelancers are classified as self-employed for tax purposes in the UK. They must register with HM Revenue & Customs (HMRC) and are responsible for paying their own Income Tax and National Insurance contributions.

Freelancer Contracts

Before you hire a freelancer, the most important part of the relationship is creating the contract. Unlike regular employees, freelancers are independent, which gives them a lot more leverage in negotiations. It also means a different kind of onboarding process and consideration of their employment status.

Best Practices for Paying Freelancers

Regarding your accounts payable workflow, paying freelancers is a bit different than paying employees on your payroll. They may operate in several different ways, each with different tax implications:

Sole Trader

The simplest form of self-employment. The freelancer is the business, and there’s no legal distinction between them. They report their income and expenses through Self Assessment and pay Income Tax and National Insurance contributions.

Limited Company (Ltd)

Many freelancers choose to set up a limited company which is a separate legal entity. The freelancer is typically both a director and a shareholder of the company. The client pays the company, and the freelancer then takes income from the company, often as a combination of a small salary (through PAYE) and dividends. This structure can be more tax-efficient, but it comes with more administrative responsibilities (e.g., filing annual accounts and corporation tax returns).

Umbrella Company

Some freelancers operate through umbrella companies. The umbrella company acts as an employer, handling PAYE and National Insurance deductions for the freelancer. This reduces the freelancer’s administrative burden, but it comes with fees, and it’s generally less tax efficient than operating as a Limited Company and determining a contract outside IR35.

Additional points to be aware of

To effectively streamline freelance working relationships: 

1. Always gather the correct tax documents for HMRC. The specific documents required will depend on how the freelancer operates:

• Sole Trader: You should obtain their Unique Taxpayer Reference (UTR) and National Insurance number.
• Limited Company: You should obtain the company’s name, registered number, and registered address. If you’re paying the individual freelancer directly, you do not need their personal tax details.
• Umbrella Company: Request the necessary payroll details as specified by the Umbrella Company

2. Ensure you have classified the worker correctly: This is crucially important, especially with introducing the IR35 (Off-Payroll Working) rules.

• Self-Employed (Sole Trader): The freelancer is responsible for their own tax and National Insurance.
• Worker: This is a less common category, but “workers” have some employment rights (e.g., minimum wage, holiday pay), but not all the rights of employees.
• Employee: If, despite being called a “freelancer,” the working relationship is actually one of employment, you should treat them as an employee for tax purposes (PAYE, National Insurance deductions, etc.)

IR35 Considerations with off-payroll working 

IR35 stands for the total of so-called “off-payroll” working rules designed to combat disguised employment. This is where a worker operates through their own limited company but, in reality, works like an employee of the client. IR35 ensures that these workers pay broadly the same Income Tax and National Insurance as if they were directly employed.

For medium and large private sector businesses (and all public sector clients), the responsibility for determining IR35 status rests with the client (i.e., your business). Small businesses are exempt, and in these instances, the freelancer is responsible.

• Inside IR35: If the freelancer would be considered an employee if they were engaged directly (without their limited company), they are “inside IR35.” This means that the fee paid to the freelancer’s company needs to have Income Tax and National Insurance contributions deducted at source (like a regular employee’s salary). The fee payer (usually your company, or an agency if one is involved) is responsible for making these deductions and paying employer’s National Insurance.

• Outside IR35: If the freelancer is genuinely self-employed, even though they operate through a limited company, they are “outside IR35.” The client pays the freelancer’s company the gross fee, and the company is responsible for its own taxes (including Corporation Tax). The freelancer can then draw income from the company.

• Status Determination Statement (SDS): If your business is responsible for determining IR35 status (Medium-large businesses, or all Public sector), you must provide the freelancer with a Status Determination Statement (SDS) before the work starts. This statement outlines your decision (inside or outside IR35) and the reasons for it. Failure to provide an SDS, or to take reasonable care in making the determination can lead to significant penalties from HMRC.

Setting the Price

The first step is asking the freelancer whether they prefer to be paid hourly or at a fixed price. Additionally, many freelancers will want a retainer or percentage upfront for goodwill, especially if you are a new client or it’s a large project.

It is common for workers to request this when payment is a fixed price as well. It is not so much the case when freelance work is paid hourly.

Consider Payment Terms

When is the due date for invoices? If there is a late payment fee, this should be in the contract.

You should also discuss with the freelancer the checkpoints they have to meet to get paid and what happens if they are not met.

Both parties should agree on how to structure payments, such as:

Paying Upfront

Don’t put all your eggs in one basket in a new relationship. You should only consider paying everything upfront if you trust the freelancer and have previously worked together.

Even then, however, it is a gamble since they are sole traders. If anything happens to your freelancer and they cannot work, you have paid for something you won’t get.

Paying After Completion

This is where the freelancer’s trust in you comes into play. Keep in mind, the more experienced the contractor, the less likely they are to accept these terms, especially if the relationship is new. However, this is the least risky option for a small business or startup.

You should also consider any materials or resources that need to be paid upfront and whether asking the contractor to cover these initial costs is fair. Remember, the idea here is to build positive working relationships with freelancers so you always have skilled professionals on hand.

Milestone Payments

Another option is to pay in installments as you go. The most common way is to pay half upfront and the other half upon completion.

If you commission a larger project that spans over months, you may want to consider setting up milestone payments with the freelancer. In this case, you can pay a third up front, a third halfway through, and a third upon completion—or however both parties agree to break it out.

Hourly Payment

Sometimes, if you trust the freelancer, paying them by the hour may be easiest. There’s less paperwork and fewer payments to make. This can be done in various ways.

Some contractors use a third-party freelance platform like Upwork, while others use time-tracking software. It all depends on your system and agreement with the contractor.

Resources

If the freelancer needs to purchase any resources or you need to provide assets to get the job done, this should all be listed in the contract. Make sure if you allow the contractor to do their own procurement, they keep well-documented receipts and expense reports.

Ground Rules

The contract must clearly state how long the project will take and what happens if it is not completed. This includes how much payment is due to the freelancer and who owns the completed work.

Lay out ground rules for sharing resources. What happens if a client doesn’t get you a draft on time? How long should a freelancer wait for your resources before it affects the timeline?

Lastly, what happens when payments are not made on time should be discussed. Is there a late fee? Will work be withheld?

Intellectual Property

If the freelancer is producing creatives, it’s important to clearly define who owns what. For example, if you hire a graphic artist to print t-shirts, can you use the same design years down the road for hats? Can you reuse photographs a freelancer provides?

Non-Disclosure Agreement

It’s also important to have a freelancer sign a Non-Disclosure Agreement (NDA) to protect a company’s intellectual property. This document governs exactly what can and cannot be shared about the specific project.

Onboarding Process

The smartest way to onboard any new person in your company is through automation. Rather than an accounting team sorting through stacks of paperwork and chasing new clients, a self-service supplier portal neatly does the trick.

Supplier Portal

The primary role of any accounts payable department is to make payments for a business. 

However, the AP team often becomes more like a “help desk”—answering consistent questions or guiding new vendors through the onboarding process. Your AP staff are not customer service representatives. 

Providing a self-service supplier portal for freelancers puts the onus on them to collect, file, and maintain all work-related documents like tax forms, IDs, bank account details, etc. This means AP staff can focus more on aligning business processes and meeting growth needs.

Self-service onboarding gets new freelancers up and running quickly. Contractors can use the portal to update information, set up invoicing, track payments, and more. Automating this process not only cuts out manual labour but also eliminates duplicate registrations.

Some key advantages to automating the freelancer onboarding process include:

Identifying Issues

A supplier portal allows a business to collect data from a freelance business securely. 

AP automation tools like Tipalti provide a rules engine driven by over 26,000 different rules. This will identify payment issues before they happen and reduces error rates.

The rules you have in place for your freelancer payment system should include:

• Notifying of any indiscretions
• Vetting and validating local bank details, such as SWIFT and IBAN codes
• Screening against relevant sanctions lists

All of this data is based on the payee’s preferred payment method and country of origin.

Tax Compliance and Documentation

No matter where a freelancer lives, your business must ensure tax compliance with HMRC regulations from anyone you hire. Your payment process should have a preferred method and currency, but it’s also important to be flexible.

In the UK, freelancers are classed as self-employed. Therefore, if you hire such a worker, you’ll have to follow a set of rules, including those around IR35 if applicable.

In most cases, it’s crucial to obtain the freelancer’s UTR (for sole traders) or the company details (for limited companies) to ensure proper reporting to HMRC. 

Separately, if the freelancer is working in the construction industry, the Construction Industry Scheme (CIS) rules apply. Under CIS, contractors must deduct money from a subcontractor’s payments and pass it to HMRC. These deductions count as advance payments towards the subcontractor’s tax and National Insurance.

Self-registration on a supplier portal will prompt all freelancers to provide their VAT number or local tax ID as part of the entire onboarding and data capture process.

This helps keep all information up-to-date, especially since accurate data is tied to a supplier getting paid. It is the responsibility of the freelancer to pay tax to the HMRC.

Registering with HMRC

It starts with the freelancer registering as self-employed with HMRC. This will give you all identifying information needed for tax purposes, including:

• Name
• Type of business (Sole Trader, Partnership, Limited Company…)
• Unique Taxpayer Reference (UTR) number (for sole traders) or Company Registration Number (for Limited Companies)
• National Insurance Number (for sole traders)
• If applicable, details of relevant industry certifications or qualifications (e.g., for safety or compliance in specific sectors)
• Other data depending on the industry

AP automation and invoicing software typically provides a supplier portal where all of this tax information is collected electronically.

Proper Forms

Artificial intelligence is built into AP automation software to ensure every payee is selecting the proper forms. This involves submitting the correct documents based on the payment method, currency, taxes, and country of origin.  

Once the right form is selected, the program will digitise the document and apply thousands of rules.

When onboarding, businesses and freelancers should determine whether the engagement falls inside or outside of IR35 rules. If inside IR35, the business will need to deduct and pay income tax and NICs at source, as well as any apprenticeship levy owed.

To handle freelancer onboarding, look for tax compliance that supports:

• HMRC Compliance
• Verification of tax data to ensure documents are complete.
• Tax IDs collected and optimised for electronic signatures.
• Protects a business from HMRC penalties.
• Confirmation of self-employment status and IR35 applicability

The freelancer is responsible for filing their own Self-assessment tax return and reporting their income and expenses to HMRC. Your payment platform or accounting software should help you keep accurate records of payments made to freelancers, which can be useful for your own accounting and for providing information to freelancers if they need it for their tax returns. Look for software that is compatible with HMRC’s Making Tax Digital requirements, if applicable to your business.

International Freelancers and International Payment Considerations

You should also have an AP solution that provides tools for international payments, like VAT and local tax ID capture. Platforms like Tipalti allow businesses to use local tax/VAT ID collection in 190+ countries.

The more countries a platform supports, the more freelancers you can hire.

When paying freelancers internationally, consider challenges such as:

• Currency conversion fees
• Exchange rates
• Compliance with international tax regulations

Additional documents may be needed for European countries. This includes features like self-billing invoices, where you must approve all documents before payments can be processed. 

You need a system with a built-in tax engine that validates against multiple rules to prevent any ID errors or cross-border issues. This helps to simplify the invoice process further down the road.

The supplier hub you provide for freelancers should also support multiple languages. It must give contractors the option to choose specific payment thresholds that keep your business in full tax and regulatory compliance.

Payment Status

One of the most significant disruptions in the AP workflow is when suppliers flood it with requests for payment status. Trigger-based messaging helps remove bottlenecks, ensure accurate data, and keep freelancers updated.

Automated communications mean you are on the same page with contractors at every step of the payment process. Status notifications can be sent via email or text and will include information on:

• Invoice status
• Payment history
• Missing payment information
• Request for documents

This helps to reduce processing costs and elevate the freelancer business relationship. With this proactive approach, freelancers onboard faster, are confidently paid, and consistently kept in the loop.

Payment Methods and Platforms

When it comes to paying freelancers, you have a multitude of options.

Paper Cheque

The oldest means of paying any contractor is with a paper cheque. As the virtual divide increases between in-office employment and remote work, paying with a cheque isn’t always feasible, especially if your freelancer is located in another country.

That being said, cheques are the simplest form of payment. The cost is limited to the cheques, envelope, labour, and postage. Many freelancers do not prefer this method for obvious reasons. Lost cheques, bounced cheques, and lengthy payment windows are top concerns for a contractor.

If your bank offers bill pay, you can use this method to have a cheque sent to freelancers without incurring extra costs to you or your freelancer.

PayPal

PayPal is one of the most popular ways to pay a freelancer and for good reason. The online payment processing service has been around for a long time. Although it’s a fast way to send money, freelancers are charged a percentage of the transaction. This means, when using PayPal, smart contractors generally raise their prices to offset the fees.

There are ways to limit PayPal’s costs. Invoicing outside of the platform saves freelancers money, and a business is only charged a small fee per transaction. It’s also worth noting that PayPal fees are, in fact, tax-deductible in the UK if they are wholly and exclusively for the purpose of your trade.

Credit and Debit Cards

Companies like Square allow freelancers to accept credit and debit cards over the internet. It’s fast, and fees are relatively low, but you must be comfortable sharing your credit card information with the payee. 

Bank Transfer

A bank transfer is secure and reliable, with money exchanged directly between bank accounts. However, the fees for bank transfers can be very high when using CHAPS; fees can cost £25 or more per transaction. When using BACS, it can take up to three business days to clear. With faster payments, which is now the most common way to transfer money in the UK with bank accounts, the transfers are usually instant or within a few hours at the latest. 

Bank transfers DO make sense if you’re dealing with a large sum of money because it ensures the money is highly secure.

Direct Debit (e.g. GoCardless)

Direct Debit, facilitated by providers like GoCardless, offers a seamless way to collect recurring payments. It’s particularly useful for ongoing projects or services. The freelancer authorises the business to collect payments directly from their bank account, ensuring timely and consistent cash flow. This method reduces administrative overhead and the risk of late payments.

Accounting Software

Many freelancers have accounting software set up and expect to be paid electronically. Tools like QuickBooks and Xero enable the contractor to create and send invoices through the system and then accept payment from your business.

Payment processing is always secure and fast, with relatively low fees (none for you). Companies often prefer this method because they feel reassured by paying through a trusted brand.

Freelancer Platform

The places where you find freelancers are also a great means of paying them. Platforms like Upwork and Freelancer.com have a built-in onboarding and payment process that accepts all payments from a business on behalf of the contractor. 

Although this method is secure and reliable, both parties have to pay varying fees for the service. There may also be restrictions on how and when the freelancer can withdraw their money. 

Additionally, a business is usually asked to deposit funds into escrow with freelance platforms. This is to ensure the freelancer has a deposit upfront. However, it’s money you have to pay immediately before initiating the business relationship. Not all platforms or projects ask for escrow, but it should be noted.

Payment Gateway

If a freelancer has a built-in payment gateway on their website, a business can pay there. A contractor can easily add an online checkout system to receive payments through a site.

You may be familiar with some online payment gateway brands like:

• Stripe
• Worldpay
• Opayo (formerly Sage Pay)
• Checkout.com

This payment method is only worth the cost if the freelancer receives a high volume of transactions per month. You typically will not see this payment type, but it can happen with popular professionals.

Online Payment Solution

If you’re hiring freelancers overseas, chances are they’ll be using an online payment solution. That’s because it’s one of the easiest payment methods for international transactions. 

These platforms are important for paying people in a different currency and will convert money for you. Plus, freelancers receive the funds quickly, with few fees.

Due to the competitive market, you’ll find a lot of good payment deals through these programs. Expect to see brand names like:

• Wise (formerly Transferwise)
• Google Pay
• Revolut
• Payoneer
• Skrill

To make transactions through an online payment solution, you must have an account. They’re typically free to open.

International Payment Methods

When it comes to paying freelancers globally, it’s crucial to have all your ducks in a row before the project starts. A few questions to consider during negotiations with the contractor include:

• What currency do you want to be paid in? (it may differ from their country of origin)
• Does this preferred method work in your region? For example, your client may prefer a bank transfer, but it’s not even an option if they live in India.
• Will my business have to pay foreign exchange fees? This helps to determine the exact payment method.

International Preferred Payment Methods

If you still need a little push, consider these top payment methods by region:

• United Kingdom – Bank transfers (BACS, faster payments) and card payments
• United States – Credit cards
• Europe – Local or regional SEPA bank transfers
• Japan – Credit cards or cash at Kombini
• China – Online payment solutions (AliPay and PayEase are top)
• India – Internet bank payments
• Russian Federation – Qiwi kiosk-style payments, online payment solutions (Yandex is top)
• Latin America – Local and regional online payment solutions (DineroMail and MercadoPago are top)
• Africa – Mobile payments
• Asia-Pacific – Mobile payments

Top Brands for Freelancer Payments

When getting your contractors paid, there is no time to waste! If you’re still wondering how to start your search, consider these top brands:

Tipalti

Tipalti is one of the best brands for paying freelancers worldwide. It offers invoice-to-pay-to-reconciliation automation with in-depth vendor management tools. The platform also employs a dynamic self-service portal that walks freelancers through onboarding. 

Save time and money with secure, pre-built integration methods and a full-featured API. No matter your freelancer payment workflow, Tipalti is a tool that can accommodate it. 

It removes the friction involved in processing contractor invoices and reconciling international payments. The platform also integrates seamlessly with other popular platforms, such as Sage Intacct, NetSuite, and QuickBooks. 

Top features include:

• Payment options in over 196 countries
• 120 different currencies
• Choose Global ACH, bank transfers, paper cheques, prepaid debit cards, or PayPal – KPMG-verified

Wise (formerly Transferwise)

One of the best ways to pay global freelancers is through Transferwise. The online money transfer service is based out of London and makes it easy for freelancers to send you invoices. The service is significantly cheaper than PayPal and allows freelancers to receive money from anywhere like a local.  

Wise will convert currencies and even offers a debit card. However, unlike freelancer platforms, Wise does not have escrow accounts or payment protection for freelancers. This solution is a great option for global payments but is a tad riskier than platforms like PayPal.

PayPal

PayPal is among the most common methods of paying freelancers. When you make a payment, contractors receive the funds immediately into their PayPal account. The freelancer then has the option to withdraw to their local bank account or a prepaid PayPal debit card. 

Opening an account is free for all parties. Businesses do not have to pay anything when making payments to UK accounts, But there are fees for receiving money, currency conversion and international transactions, which vary depending on the currency and the location.

PayPal is good if you’re working with one or two freelancers every now and then. The more people you add to the roster, the harder it becomes to manage. The platform lacks common freelancer management tools like security, escrow, and tracking.

GoCardless

GoCardless specialises in Direct Debit payments, making it ideal for businesses that need to make regular, recurring payments to freelancers. With GoCardless, businesses can automate payments on a set schedule without manually processing invoices or transfers each time, making it convenient to shorten payment cycles and get paid on time. 

Revolut Business

Revolut Business offers multi-currency business accounts and competitive exchange rates, making it a great choice for businesses that work with international freelancers and need to make payments in different currencies. With Revolut Business accounts, businesses can hold balances in over 30 currencies and make quick exchanges between currencies at interbank rates.

Stripe

Stripe allows businesses to easily accept one-off or recurring payments online through credit cards, Apple Pay, and other methods. This makes Stripe ideal for businesses that sell products and services digitally, including those that pay freelancers for ad hoc or project-based work. Stripe handles the technical integration and security required to take online payments, allowing businesses to get up and running quickly.

How UK Businesses Can Pay Freelancers Securely and Efficiently

The method you choose must streamline the freelancer payment process and should be agreeable to all parties. If you’re paying a contractor in an expensive way, they’ll either move on or raise their prices. It’s not conducive to developing a long-lasting relationship.

The face of business is changing, and the rise of the gig economy demands a new way of doing things. Freelancers are just as important as your regular, full-time employees—they simply serve a different function. The faster you can find an efficient way to pay them, the more of a competitive edge your business gains. 

The gig economy is not going away. Streamline your freelancer payment process now; it’ll be smooth sailing for future projects.

Need to dive deeper into contractor payments? Explore Tipalti’s end-to-end payables solution for freelancers and contractors worldwide.