Employ or Subcontract? A Straight Cost Comparison for Contractors

"Do I take someone on, or just keep using subbies?" It's one of the biggest decisions a growing contractor makes, and it's usually made on gut feel and a day rate. But the day rate is only the visible tip of the cost, and getting this call wrong is expensive either way.

Here's a straight comparison: the real cost of each route, the flexibility trade-off, and the employment-status trap that lands contractors with unexpected tax bills.

The two routes at a glance

The true cost of an employee

The wage is the number everyone quotes, but it's rarely more than three-quarters of what an employee actually costs you. On top of the gross wage sit:

• Employer's National Insurance on their earnings.
• Pension contributions under auto-enrolment.
• Holiday pay, around 5.6 weeks a year when you include bank holidays, during which they earn but don't produce.
• Sick pay, training, tools, PPE and van where you provide them.
• Downtime, the single most overlooked cost. An employee is a fixed cost in a slow week; you carry them whether the work is there or not.

Cost per productive hour, the number that matters

An employee is paid for roughly 260 weekdays a year but works far fewer once you strip out holidays, bank holidays, the odd sick day and gaps between jobs. Spread the full cost (wage + on-costs) over the hours you actually get on the tools and the effective rate climbs a long way above the headline wage. A subcontractor, by contrast, only costs you when they're working, but at a higher rate for those hours.

The employment-status trap

Here's the one that catches people out. Calling someone a "subcontractor" and paying them under CIS doesn't automatically make them self-employed in HMRC's eyes. What matters is how the relationship actually works.

If someone works only for you, on your hours, under your control, using your tools and taking no financial risk of their own, HMRC may decide they're really an employee, regardless of what the invoice says. If they reclassify, you can be hit with back-dated PAYE and National Insurance, plus penalties and interest. Construction is an area HMRC watches closely, so it's a real risk, not a theoretical one.

The practical test is a handful of questions: Who controls how and when the work is done? Who provides the tools and materials? Can they send someone else in their place? Do they take any financial risk? The more the answers point to you, the more it looks like employment, and the safer route may be to put them on the books properly.

How to actually make the call

1. Look at your workload, honestlySteady, predictable work that would keep someone busy year-round points to employing. Lumpy, unpredictable or specialist work points to subcontracting.
2. Work out the true cost per productive hourFor an employee: wage plus all on-costs, divided by the hours you'll realistically get. Compare that to a subbie's rate for the same output.
3. Check the employment-status riskIf a "subcontractor" would look and work like an employee, factor in the cost and risk of getting that wrong.
4. Think beyond the numbersReliability, quality, loyalty and the ability to grow a team have real value that doesn't show up on a rate card.

For most growing firms the answer is a blend: a small, reliable employed core for the steady baseline work, topped up with subcontractors for the peaks. The trick is knowing where your baseline sits, and that comes straight out of the kind of job and cash flow numbers we help contractors get a proper handle on.

This article is general guidance for building contractors, not advice for your specific situation. Employment status and employment costs have real consequences, always check your own circumstances with your accountant before acting.