Legal Entity explained

EOR vs Setting Up a UK Legal Entity: Cost and Risk Compared

So you want to hire someone in the United Kingdom. The question is: do you set up your own UK company, or do you use a UK Employer of Record?

It is a decision that comes down to three things: how many people you plan to hire, how quickly you need them to start, and how much ongoing compliance you are prepared to manage. Get it right, and you save thousands of pounds and months of admin. Get it wrong, and you either overpay for a small team or end up trapped in a compliance nightmare you did not sign up for.

This guide compares both options in detail, with real costs, timelines, and a decision framework to help you choose.

What is the difference between an EOR and setting up a UK entity?

An Employer of Record (EOR) is a third-party organisation that becomes the legal employer of your UK-based workers. It handles payroll, tax, benefits, and compliance with UK employment law. Your company manages the employee's day-to-day work, but the EOR is the one HMRC sees as the employer. You do not need a UK company to use an EOR.

Setting up a UK entity means registering your own company with Companies House, opening a UK bank account, registering for PAYE and National Insurance with HMRC, and taking on all the obligations of a UK employer. Your company is the legal employer, and you are responsible for everything from payroll to pensions to corporation tax.

The EOR gets you hiring in days. The entity gets you a permanent UK presence, but it takes weeks to set up and comes with ongoing compliance obligations.

What is an Employer of Record?

An Employer of Record is a third-party organisation that legally employs workers on your behalf in a country where you do not have your own entity. In the UK, the EOR issues the employment contract, operates PAYE and National Insurance, manages pension auto-enrolment, and ensures compliance with UK employment law.

Your company retains full control over the employee's day-to-day work. You decide what they do, how their performance is measured, and what projects they work on. The EOR handles the legal and administrative side.

The model works through a three-party relationship. The EOR is the legal employer. Your company is the managing employer. The employee works for you in practice, but the EOR is the one that HMRC sees as the employer. You can learn more about how EOR works in the United Kingdom.

What is a UK legal entity?

A UK legal entity is a company that is registered in the United Kingdom and recognised as a separate legal person. The most common type is a private limited company (Ltd), which is registered with Companies House and has its own legal identity, separate from its owners.

Setting up a UK limited company is relatively straightforward. You need at least one director, a registered office address in the UK, and a memorandum and articles of association. The registration can be done online through Companies House and usually takes 24 to 48 hours. However, that is just the registration. The real work starts after.

Types of UK entities

There are several types of UK entity you can set up:

Private limited company (Ltd): The most common choice for foreign companies hiring in the UK. It has a separate legal identity, limited liability for shareholders, and is relatively simple to set up and maintain.

Limited liability partnership (LLP): Often used by professional services firms. It combines the flexibility of a partnership with the limited liability of a company.

Branch office: An extension of your foreign company, rather than a separate legal entity. The parent company is liable for the branch's obligations.

For most international employers hiring in the UK, a private limited company is the right choice. It is the most flexible structure and the one that HMRC and other UK authorities are most familiar with.

EOR vs UK entity: key differences

Speed to hire

This is where the EOR model has a clear advantage. An EOR can have someone employed within one to five days. The EOR already has a UK entity, payroll systems, and compliance processes in place. You find the candidate, and the EOR handles the rest.

Setting up a UK entity takes four to eight weeks before you can hire your first employee. The Companies House registration itself is quick (24 to 48 hours), but you also need to register for PAYE and National Insurance with HMRC, set up a UK bank account, establish a payroll system, and set up pension auto-enrolment. Each of these steps takes time, and some require documentation that can take weeks to prepare.

Cost comparison

The costs are more nuanced than they might first appear.

For a single employee, the EOR is almost always cheaper. For a team of 15 or more, the entity starts to make financial sense, because the ongoing costs of the entity are largely fixed regardless of headcount, while EOR costs scale linearly with each employee.

Compliance burden

This is the factor that most businesses underestimate.

With your own UK entity, you are responsible for:

PAYE and National Insurance: You must operate PAYE, deduct income tax and employee NI from wages, pay employer NI contributions, and submit Real Time Information (RTI) returns to HMRC every time you pay an employee.

Pension auto-enrolment: You must automatically enrol eligible employees into a workplace pension scheme. The minimum contribution is 8% of qualifying earnings, with the employer paying at least 3%.

Employment contracts: Every employee is entitled to a written statement of their principal terms on or before their first day of work, as required by the Employment Rights Act 1996.

Statutory leave and pay: UK employees are entitled to a minimum of 5.6 weeks of paid annual leave, statutory sick pay (£123.25 per week, or 80% of average weekly earnings if lower, payable from the first day of sickness for up to 28 weeks), and statutory maternity/paternity pay.

Right to work checks: You must verify every employee's right to work in the UK before they start. The penalty for employing someone without the right to work is up to £60,000 per illegal worker.

Annual accounts and corporation tax: You must file annual accounts with Companies House and a corporation tax return with HMRC. Corporation tax is currently 25% for profits over £250,000.

Health and safety: You have obligations under the Health and Safety at Work etc. Act 1974 and related regulations.

Data protection: You must comply with the UK GDPR and the Data Protection Act 2018.

With an EOR, all of these obligations sit with the EOR. The EOR handles payroll, tax, pensions, contracts, and compliance. Your only responsibility is managing the employee's day-to-day work.

Control and flexibility

With your own entity, you have full control over every aspect of the employment relationship. You issue the contracts, you set the policies, and you make changes directly.

With an EOR, the employment contract is between the employee and the EOR. Any changes to the contract, such as a pay rise, a change in hours, or a new job title, must go through the EOR. This adds a layer of administration, though a good EOR will process changes quickly and efficiently.

How to register a UK entity

If you decide that setting up your own entity is the right move, here is what the process looks like.

Companies House registration

You register your company with Companies House, the UK's registrar of companies. You need at least one director, a registered office address in the UK, and a memorandum and articles of association. The registration can be done online and usually takes 24 to 48 hours.

HMRC and tax registration

Once your company is registered, you need to register for:

• PAYE and National Insurance: So you can operate payroll and deduct tax from employee wages.
• Corporation tax: Within three months of starting to trade.
• VAT: If your taxable turnover exceeds £90,000 per year (as of 2026)

Each registration has its own process and timeline. PAYE registration can take up to two weeks.

Ongoing compliance obligations

Once your entity is set up, you have ongoing obligations:

• File annual accounts with Companies House.
• File a corporation tax return with HMRC.
• Submit RTI returns every time you pay an employee.
• Maintain a register of people with significant control (PSC register).
• Keep statutory books and records.

These obligations require time, expertise, and usually an accountant. If you are a foreign company unfamiliar with UK requirements, the learning curve can be steep.

When to choose an EOR for UK hiring

An EOR makes sense in several scenarios:

• You are hiring fewer than 15 employees. For small teams, the setup and ongoing costs of a legal entity are disproportionate. An EOR provides a more cost-effective solution.
• You need to hire quickly. An EOR can have someone employed within days. An entity takes four to eight weeks to set up.
• You are testing the UK market. If you are not sure whether the UK is right for your business, an EOR lets you hire a small team without the commitment and cost of a subsidiary.
• You want to minimise compliance risk. UK employment law is detailed and frequently updated. The Employment Rights Act 2025, for example, introduced significant changes to worker protections. An EOR with UK expertise handles all of this for you.
• You want to avoid permanent establishment risk. If your UK activities could trigger a permanent establishment for tax purposes, employing through an EOR can help manage that risk. The EOR is the employer, not your company.

If you want to understand the full range of EOR options, see our guide to the best Employer of Record providers in the UK.

When to set up your own UK entity

Setting up your own entity makes sense when:

• You are hiring 15 or more employees. At this scale, the fixed costs of an entity become more cost-effective than the per-employee EOR fee.
• You need a permanent UK presence. If you plan to have an office, enter into commercial leases, or build a long-term UK operation, your own entity is essential.
• You want full control over the employment relationship. With your own entity, you issue the contracts, set the policies, and make changes directly.
• You are entering a regulated industry. Some UK industries require the employer to hold specific licences or registrations, which may not be possible through an EOR.

The hybrid approach: EOR first, entity later

Many businesses start with an EOR and then set up their own entity once they have established that the UK market is right for them. This is sometimes called the "EOR bridge" approach, and it is one of the most pragmatic ways to enter a new market.

The idea is simple: use an EOR to hire your first few employees, test the market, and build your UK team. Once you have reached a scale where an entity makes financial sense (typically 15 or more employees), set up your own company and transfer the employees across.

The transfer process is governed by TUPE (Transfer of Undertakings Protection of Employment) regulations in the UK. These regulations protect the employees' terms and conditions during the transfer, so you cannot use the transition as an opportunity to reduce pay or benefits. A good EOR will support you through this process and ensure a smooth handover.

If you are comparing EOR to other hiring models, you might also find our EOR vs PEO comparison useful.