If you're looking for full-time employement, then yes, you should indeed be an employee. As should be the norm at a commercial FTO.
But if you only want to do a bit of PPL-level instructing now and again at Club level and you've got a 'real' job elsewhere, then it'll be simpler for all concerned if you're self-employed. Just declare your additional income on your income tax declaration and don't forget to offset legitimate expenses against tax....
When Club instructors were predominantly part-time PPL/FIs or R/BCPL/FIs who were happy to do a day or two's instructing now and again, there was rarely a problem; it suited everybody. But now that there are so many hours-building airline co-pilot wannabes around who think that the world owes them a living, there's all this carping about 'minimum salaries', 'the school should pay for my medical, revals, BUPA' etc., there seems to be a perceived problem.
If you want to receive a salary of about £30K as a full-time PPL instructor, then first find me some customers who will pay £200 per hour to fly a 30 year old Cessna 152. Until then, accept that UK PPL training can never afford to pay what I would call a half-decent salary. At least, not while it's still so easy to learn to fly at vastly lower expense in the USA.
Hopefully we'll see the return of part-time PPL/FIs (who may be paid for instructing) before too long - and the airlines will have to go back to proper training schemes for their co-pilots.