Small Business Accountants

How do I pay a Contractor?

To pay a UK contractor, first verify that they are genuinely self-employed or a limited company supplier, run an IR35 status check if the contractor works through a personal service company, and record the relationship for HMRC. Contractors are paid against their own invoices, usually by bank transfer on the agreed terms. Construction industry payments may require Construction Industry Scheme deductions of 20% or 30%.

By Jordan Macey MAAT Reviewed by Noor Fiaz Updated 16 Apr 2026 1

How do I pay a Contractor? - Contractor Payment Options - GoForma Small Business | UK Accountants & Tax Advisors

Key takeaways

Contractors are self-employed or operating through their own limited company, so you do not deduct income tax or National Insurance under PAYE when you pay their invoices.
IR35 and the off-payroll working rules require medium and large private-sector businesses to assess contractor employment status and deduct tax at source if the rules apply.
The Construction Industry Scheme requires you to deduct 20% (verified subcontractor) or 30% (unverified) from labour payments to construction subcontractors and pay HMRC.
HMRC's Check Employment Status for Tax tool (CEST) helps determine whether a contractor falls inside or outside IR35; keep a record of your determination for each engagement.
A written contract should set out the agreed rate, payment terms, scope of work, and termination provisions to protect both parties and support your status determination.

You can pay an independent https://goforma.com/contractors" target="_blank">contractor by an hourly or daily rate, or by the project through the contractor's preferred payment method. You won't need to withhold taxes, as they are responsible for paying their own income and National Insurance contributions.

Frequently asked questions

Do I need to deduct tax when paying a contractor?

In most cases, no. If a contractor is genuinely self-employed or operates through their own limited company, they are responsible for paying their own income tax and National Insurance via Self Assessment or their company's payroll. You pay their invoice gross. The exception is if IR35 or the off-payroll working rules apply, in which case you must deduct income tax and employee National Insurance and pay employer National Insurance contributions before they receive payment.

What is IR35 and when does it affect contractor payments?

IR35 is the off-payroll working legislation that targets contractors who work like employees but bill through a personal service company to reduce their tax. Since April 2021, medium and large private-sector businesses must assess each contractor engagement using HMRC's CEST tool and issue a Status Determination Statement. If the determination is inside IR35, the business (or its agency) becomes the fee-payer and must operate PAYE and National Insurance on the contractor's fees.

What is the Construction Industry Scheme and who does it apply to?

The Construction Industry Scheme (CIS) applies when a contractor in the construction industry hires subcontractors for construction work. As the paying contractor, you must register with HMRC, verify your subcontractors, and deduct 20% from labour payments for verified subcontractors or 30% for unverified ones. These deductions are paid to HMRC and credited against the subcontractor's tax bill. CIS does not apply to materials costs, only to labour.

How should I actually pay a contractor?

The most common method is a direct bank transfer on receipt of a formal invoice from the contractor. The invoice should show their name or company name, address, services provided, the agreed amount, and their payment reference. Agree payment terms upfront in the contract, for example 14 or 30 days from invoice date, and stick to them consistently. If the contractor is VAT-registered, you pay the VAT element on top and reclaim it on your own VAT return.

Do I need a written contract with a contractor?

A written contract is not a legal requirement but is strongly recommended. It sets out the rate, payment terms, scope of work, intellectual property ownership, confidentiality obligations, and notice provisions. Critically, it also supports your employment status determination under IR35, as the contract is one of the documents HMRC will examine if a dispute arises. A contract that reflects actual working practice (rather than just the desired outcome) is far more robust.

How do I check whether a contractor is genuinely self-employed?

Use HMRC's Check Employment Status for Tax (CEST) tool, which asks questions about control, substitution, financial risk, and mutuality of obligation. A result of 'outside IR35' means you can pay gross; 'inside IR35' triggers payroll obligations. You should save the CEST result and any supporting evidence. Note that CEST does not cover all edge cases, and HMRC will not stand behind the result if the information entered does not reflect the true working arrangement.

What records do I need to keep for contractor payments?

Keep copies of all invoices, bank payment records, the signed contract, and your IR35 status determination for each engagement. If you operate CIS, retain monthly CIS300 returns and the deduction statements given to subcontractors. HMRC recommends retaining business records for at least six years. Good records protect you in the event of an HMRC compliance check and allow you to correctly apportion costs when preparing accounts or Self Assessment returns.

Can I pay a contractor in cash?

You can pay in cash, but it is inadvisable for anything beyond very small amounts. Cash payments are harder to trace, make invoice reconciliation difficult, and can raise concerns in an HMRC enquiry if records are incomplete. Bank transfer creates a clear audit trail that ties directly to the contractor's invoice. If cash is used, both parties should still exchange a formal invoice and receipt, and the payment must be included in your business accounts and the contractor's tax returns.

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