EOR vs. setting up a legal entity in the UK: a cost comparison

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• An Employer of Record (EOR) offers a fast, low-risk way to hire employees in the UK without setting up a legal entity, ideal for short-term or small-scale hiring.
• Setting up a legal entity in the UK involves higher upfront and ongoing costs but provides greater control and long-term cost efficiency, especially for companies planning to scale.
• Cost-effectiveness depends on scale and duration—EORs are more economical for fewer hires or shorter engagements, while legal entities are better suited for long-term operations with multiple employees.

For international companies eyeing expansion into the United Kingdom, one of the primary considerations is how to legally hire employees and operate within the country compliantly.

Most organisations will find themselves weighing up two distinct options. The first is engaging workers through an Employer of Record (EOR). The second is establishing a local legal entity. Each route comes with its own advantages, challenges, and, crucially, costs. Understanding the financial implications of both options is key to choosing the right structure for your business goals.

Let’s compare the EOR model with the process of setting up a legal entity in the UK. We'll take a closer look at the differences in cost and complexity. This will help to determine which is the best mode of global expansion for your business.

What is an Employer of Record?

An Employer of Record is a third-party service provider that legally employs workers on behalf of another company. While the client business directs the employee’s tasks and oversees day-to-day operations, the EOR handles the formal employment relationship, including payroll, tax withholdings, benefits, and compliance with local labour laws.

In the context of the UK, an EOR enables foreign companies to hire talent without going through the process of establishing a UK-based entity. This can significantly reduce both the time it takes to go to market as well as any and all legal risks. The EOR shoulders the responsibility for adhering to employment law in areas such as contracts, statutory benefits, termination procedures, and workplace protections.

There are several reasons companies may seek a fast, low-commitment entry into the UK market. Perhaps they wish to test a new region, launch a temporary project, or hire a small number of staff. In these instances, using an EOR is often the most efficient path.

EOR is attractive because it consolidates a number of services and service fees into a single monthly payment. In doing so, EOR significantly reduces the internal administrative burden for the client company.

For more information on Employer of Record, visit our Ultimate guide to Employer of Record.

What does it mean to set up a legal entity?

In contrast, setting up a legal entity in the UK usually means incorporating a private limited company. This involves registering the business with Companies House, establishing a corporate structure and ensuring compliance with UK tax and employment laws.

After incorporation, the company must register for Corporation Tax and potentially VAT, depending on annual turnover. Setting up PAYE (Pay As You Earn) is necessary to process payroll and fulfil employer obligations such as National Insurance contributions.

Forming a legal entity is not just a legal exercise, it’s a strategic commitment to the UK market. It offers full operational control and allows the business to establish a more permanent and recognised presence. Companies with plans to scale their workforce, build brand recognition or invest in infrastructure—such as physical office space or local partnerships—typically benefit more from this approach.

However, this route comes with substantial time investment and ongoing admin responsibilities. Establishing a permanent entity in the UK requires legal, accounting, and payroll support. All of these introduce additional costs to be considered alongside the broader strategic benefits.

Comparing the costs

It is important to consider both the initial and ongoing expenses associated with each route when comparing the costs of using an EOR versus establishing a legal entity.

The cost of using an EOR in the UK

The EOR model is typically more cost-effective in the short term than establishing and entity. Most EOR providers charge either a flat monthly fee per employee or a percentage of the employee’s gross salary. These fees generally cover payroll processing, statutory benefits, compliance management, and the legal employment framework.

Often, no significant upfront costs exist beyond the first month’s fee. In addition, onboarding can happen within one to two weeks. Speed and simplicity are major advantages for businesses needing to move fast or keep costs down while exploring a new market.

The cost of establishing a legal entity in the UK

Setting up a legal entity involves a range of upfront expenditures. Registering a UK company through Companies House is inexpensive on its own. However, global employers will usually need to seek legal advice on labour laws when establishing a foreign entity in the UK. This can easily elevate costs into the range of several thousand pounds.

Incorporation support, legal counsel, accounting services, and payroll setup can collectively cost between £3,000 and £6,000. This cost can rise beyond the £6,000 mark depending on the complexity of the business structure.

Furthermore, it typically takes four to eight weeks to become fully operational. This takes into account all necessary registrations and infrastructure.

Defining your business needs

Beyond setup, the differences in ongoing costs become more nuanced depending on your business’s specific needs.

Length of project – EOR

With an EOR, all compliance responsibilities are included in the monthly service fee. This can make budgeting simpler. It does this by eliminating the need for in-house administrative staff or outside consultants.

However, those monthly fees accumulate quickly. This particularly true when hiring multiple employees or maintaining long-term staff. Over time, the EOR’s per-employee cost can exceed what a company would spend managing the same employees under a legal entity structure.

Length of project – legal entity

Operating a legal entity comes with fixed annual obligations. These include accounting and auditing services, preparation of statutory accounts, and submission of tax returns. Companies can expect to spend between £2,000 and £5,000 per year on these services, with additional costs if an audit is required.

Employers must also arrange and manage statutory benefits and insurance coverage on their own, which may involve partnering with local providers. The long-term cost per employee is often lower with a legal entity. However, it requires more effort and administrative coordination.

Flexibility – EOR

Flexibility is another area where costs diverge. Offboarding employees under an EOR can be relatively straightforward. This is because the EOR assumes the legal burden of termination and compliance. Disengaging from the UK market altogether is also simple when using an EOR, as the client company has no formal legal presence in the country.

Flexibility – legal entity

In contrast, winding down a UK legal entity involves a formal dissolution process, final tax submissions, and potentially significant legal and accounting costs. This makes exiting the market more cumbersome and costly.

Which option is more cost-effective?

The right answer depends on your business goals and scale. Here’s a high-level breakdown:

Choosing the right path

Ultimately, the choice between using an Employer of Record and establishing a legal entity in the UK comes down to a combination of cost, flexibility, control, and long-term strategy.

For companies that plan to hire only a few employees or need to act quickly without heavy investment, the EOR route is often the smarter financial decision. It minimises legal exposure, accelerates hiring, and avoids the fixed costs of incorporation and administration. EORs are especially well-suited for market testing, project-based roles, or interim hiring needs.

However, for businesses with a clear long-term vision in the UK—particularly those that expect to hire at scale, open local offices, or build brand equity—a legal entity becomes more economical and practical over time. The initial investment is higher, and the administrative overhead is more demanding, but the ability to operate independently and reduce per-employee costs can pay off significantly.

Both the EOR and legal entity models offer valid and strategic entry points into the UK market. From a cost perspective, the EOR provides a lower-risk, lower-cost solution for early-stage expansion, while establishing a legal entity becomes more cost-effective for companies with larger teams and longer horizons.

Choosing between the two models requires a clear understanding of your hiring plans, operational goals, and budget. While financial considerations are central, they should be evaluated alongside compliance, flexibility, and the company’s long-term footprint in the UK. With careful planning, businesses can use one or both models at different stages to maximise value and minimise risk.

Mauve provides trusted local UK expertise and representation

EORs understand regional employment expectations – from London’s tech salaries to holiday pay norms in Cardiff. Mauve Group is a UK-based company whose founders, Ann and John Ellis, hail from Wales and England, respectively.

With a number of UK citizens on staff, and almost 30 years providing global mobility services, Mauve is perfectly placed to support organisations with all their UK hiring needs. To find out how we can help your business expand into the UK, contact us today.