Whether you’re engaged as an employee or a consultant affects your rights, your tax and how easily the relationship can end. It isn’t entirely up to you and the client, either: if a “consultancy agreement” looks like employment in practice, a tribunal or HMRC can treat it as employment.
Employment contracts
An employment contract is a contract of service. You agree to work personally for the employer, who has the right to direct and control your work, and there’s an ongoing obligation on the employer to pay and on you to work. In return you get the full set of statutory employment rights: the national minimum wage, paid holiday, statutory sick pay (payable from the first day of sickness since April 2026), family leave and pay, protection from discrimination, statutory notice and, after a qualifying period, protection from unfair dismissal and a right to statutory redundancy pay.
The unfair dismissal qualifying period is currently two years. Under the Employment Rights Act 2025 it is due to fall to six months from January 2027. Redundancy pay still needs two years’ service.
Your employer deducts income tax and National Insurance through PAYE, pays employer National Insurance on top and must auto-enrol eligible employees into a pension.
Consultancy agreements
A consultancy agreement is a contract for services. You, or your company, provide services as an independent business. The client specifies what it wants delivered but doesn’t control how, when and where you work in the way an employer would. You’re usually free to work for others, use your own equipment and methods, and you carry some commercial risk.
As a consultant you don’t get employment rights. Your protection is what the contract says: the notice either side must give, how and when you’re paid, and what happens if the work is cancelled. Some self-employed people who must do the work personally are still protected from discrimination under the Equality Act 2010, which uses a wide definition of employment.
Employee, worker or self-employed
UK law has three categories, not two. Between employees and the genuinely self-employed sit “workers”: people who must do the work personally for someone who isn’t their client or customer in a business sense. Workers get some rights, including the minimum wage, paid holiday and rest breaks, but not unfair dismissal or redundancy pay. A consultancy agreement that doesn’t reflect reality may leave you as a worker or even an employee.
How status is decided
Tribunals and HMRC look at the reality of the relationship, not just the label. The contract is evidence, but if it doesn’t reflect what actually happens, the reality wins. The main factors are:
Personal service. Must you do the work yourself, or can you send a substitute? A genuine, unfettered right to send someone else (which you could actually use) points away from employment. A right the client can veto at will counts for much less.
Control. Does the client have the right to tell you how, when and where to work? It’s the right to control, not how often it’s used, that matters.
Mutuality of obligation. Is the client obliged to offer work and you to accept it on an ongoing basis? A rolling commitment of that kind points towards employment; a defined project with no obligation to offer or accept more points away.
The wider picture. Integration into the client’s team, other clients, who provides equipment, financial risk (fixing defective work at your own cost, for example) and the length of the engagement all count. No single factor decides it.
Tax and National Insurance
A self-employed sole trader pays income tax on profits through self assessment, plus Class 4 National Insurance. Class 2 contributions are no longer required, though they can be paid voluntarily. Business expenses incurred wholly and exclusively for the business reduce taxable profit. You’re responsible for your own returns and payments on account, and you must register for VAT if your taxable turnover goes over the VAT registration threshold.
Many consultants work through their own limited company instead. The company invoices the client, pays corporation tax on its profits, and you take money out as salary and dividends. Whether that’s more tax-efficient depends on your figures; get an accountant’s view rather than assuming it is.
If HMRC decides that tax was underpaid because the status was wrong, it can normally go back four years, extended to six where the underpayment was careless and 20 where it was deliberate, with interest and potentially penalties.
IR35 and the off-payroll rules
IR35 applies where you work through an intermediary, usually your own limited company, and would have been an employee of the client if you’d been engaged directly. Since April 2021, where the client is a public sector body or a medium or large private sector business, the client decides your status and must give you a status determination statement with its reasons. If it decides you’re “inside IR35”, whoever pays your company deducts tax and National Insurance as though you were an employee. For small private sector clients, your own company makes the decision and bears the risk.
IR35 is a tax rule. Being “inside IR35” doesn’t make you the client’s employee for employment rights purposes, and being outside doesn’t guarantee you aren’t. Our guide to IR35 and consultant contracts goes into more detail.
What to negotiate in a consultancy agreement
Notice and termination. One week’s notice either way leaves you exposed if you’ve turned down other work. A longer notice period, or a minimum term for a defined project, gives you more certainty.
Payment terms. Check when you invoice and when you’re paid. Thirty days is common. If payment is late, the Late Payment of Commercial Debts (Interest) Act 1998 gives you a right to statutory interest in business-to-business contracts unless the contract provides a substantial alternative remedy, so watch for clauses that try to exclude it.
Other clients. Make sure the contract doesn’t prevent you working for others, subject to reasonable conflict and confidentiality protections. Exclusivity also points towards employment.
Rates. Be clear whether you’re paid by the day, the hour or per deliverable, and what happens if the work overruns.
Expenses and insurance. Agree who pays for travel, software and equipment, and whether you must hold professional indemnity or other insurance and at what level. Check whether your liability under the contract is capped.
IP. Check who owns what you create. Clients will usually want to own the deliverables; you’ll want to keep your pre-existing materials and know-how.
Which suits you
Employment gives security, statutory rights and simpler tax. Consultancy gives more control and sometimes higher earnings, with the risk and admin of running a business. Either way, the label has to match the reality, so if you’re offered a consultancy agreement for what looks like a full-time role under the client’s direction, ask why.
Our contract review service covers consultancy agreements as well as employment contracts. It explains the terms in plain English and flags clauses that sit awkwardly with a genuine consultancy, such as fixed hours, no right of substitution or a ban on other work.
Related: what the employment contract review covers, and a complete sample report.