At some point in the process of figuring out how to hire in the UK, most businesses ask the same question: do we use an employer of record, or do we set up our own UK company?
Both options work. Neither is obviously right for everyone and the answer depends on how many people you’re hiring, how quickly you need them working, and how much appetite you have for ongoing administrative overhead. This guide gives you the real comparison — including the cost crossover point that most EOR providers don’t advertise.
What setting up a UK subsidiary actually involves
Companies House registration costs £50 and usually completes within 24 hours online. People often stop there and assume the hard part is done. It isn’t.
Once the company exists, you need to:
Register as an employer with HMRC. You can’t run a UK payroll without a PAYE reference number. HMRC registration takes up to five working days after you apply — and that’s before any payroll software is configured or any employee is paid.
Set up payroll. You need software capable of submitting Real Time Information (RTI) reports to HMRC on or before each payday. You need to understand PAYE, National Insurance thresholds, statutory deduction calculations, and what to do when an employee starts mid-month or changes tax code.
Auto-enrol eligible employees into a pension. Eligible employees — broadly, those aged 22 to 66 earning above £10,000 — must be enrolled in a qualifying workplace pension. You need to choose a provider, set up the scheme, handle the minimum 3% employer contribution, and manage the ongoing administration.
Manage statutory payments. Sick pay, maternity pay, paternity pay, shared parental leave. Each has specific calculation rules. As the employer, you’re responsible for getting these right.
Understand UK employment law. Minimum notice periods, unfair dismissal rights that kick in after two years of continuous employment, statutory redundancy pay calculations, right-to-work documentation requirements. None of this is obscure, but it takes time to get right, and the cost of getting it wrong ranges from fines to employment tribunal claims.
The full setup process — from Companies House registration to a compliant first payslip — typically takes four to eight weeks when a business is doing it carefully for the first time. Do it in a hurry and you’ll miss things.
Recommended Employer of Record
What an EOR gives you instead
An EOR already has the UK legal entity. It’s already registered as an employer. It already runs a payroll. It already has pension schemes set up. All the infrastructure you’d spend weeks building from scratch, the EOR has had in place for years.
When you onboard a new hire through an EOR, the EOR issues the employment contract, adds the employee to their payroll, handles auto-enrolment, and manages all the statutory obligations from day one. You direct the work. The EOR handles the rest.
Onboarding timelines are dramatically shorter. Most established EOR providers can get a UK employee fully onboarded and paid within three to five working days. If you need someone working in a fortnight, an EOR is almost certainly the only realistic option.
Ongoing management is simpler too. You receive a monthly invoice: gross salary, employer NI, employer pension contribution, and the service fee. You pay it. The EOR handles everything else, including picking up any changes to employment law without you needing to track them.
The cost crossover point
EOR is not cheap. Monthly service fees from established UK EOR providers typically sit between £300 and £700 per employee. For a single employee on a £40,000 salary, the all-in monthly cost through an EOR — salary, employer NI at 13.8%, 3% pension, and the service fee — is roughly £4,500–£5,000. Running your own compliant UK payroll for the same employee would cost around £4,000–£4,200, once payroll software and a reasonable amount of HR time are factored in.
That gap is real. It’s the cost of not having your own entity and the convenience of not building one.
The gap narrows as headcount grows, because the cost of running your own payroll is largely fixed. Payroll software costs the same whether you have three employees or fifteen. An EOR’s monthly fee scales directly with headcount — add a person, add a fee. At somewhere around 10–15 employees (the exact number depends on salary levels and what you’re paying the EOR), the subsidiary usually becomes cost-competitive.
That said, the crossover point isn’t the only thing to weigh up.
What the numbers don’t capture
Commitment level. An EOR is well-suited to testing a market or building an initial team before you’re ready to commit to permanent infrastructure. If you’re not yet sure whether the UK is a long-term priority, using an EOR avoids creating a legal entity you’d then have to wind down if things change. That optionality has value.
Speed. If you need someone working in two to three weeks, a UK subsidiary probably isn’t the answer. Four to eight weeks is the realistic timeline for getting it right. An EOR can move in days.
Equity and share options. If you want to grant employees options in your company, the EOR structure creates friction. The EOR is the legal employer — not you — and that triangular arrangement complicates EMI schemes and other equity arrangements considerably. For equity-heavy hiring, a subsidiary is cleaner.
How the employee sees it. Most employees don’t particularly care who their technical employer is, and it matters less than founders sometimes expect. But their payslip will carry the EOR’s name, not yours. Worth knowing if employer branding matters to your hiring pitch.
Control. When you employ people directly through your own UK company, you have full visibility over the employment relationship. With an EOR, you’re working through a service provider. Most of the time this is seamless. When it isn’t — a disputed termination, a grievance, an unusual employment situation — the triangular structure adds complexity that wouldn’t exist if you were the direct employer.
A decision framework
Use an EOR if you’re hiring fewer than 10–15 people in the UK, need someone working within weeks rather than months, want to test the UK market before committing, or have standard employment with no equity complexity.
Consider a UK subsidiary if you’re building a team of 15 or more, plan to offer EMI options or complex benefits, want full control and direct employer branding, or are already committed to long-term UK operations.
Worth noting: a lot of businesses do both, at different stages. Start with an EOR to move quickly; transition employees to direct employment once the subsidiary is set up and the payroll infrastructure is running. A good EOR provider will help with that transition rather than make it difficult.
Start with our guide to EOR services and to help you choose a supplier, our shortlist of the ten best EORs for UK businesses covers more detail.
