An important layer of the way most large organisations, and their recruitment agencies, manage risk is likely to ‘become redundant’ under the newly announced 2024 UK Budget. A significant policy change may affect all businesses that use umbrella companies to hire and pay temporary and contract workers.
Starting in April 2026, the responsibility for Pay As You Earn (PAYE) tax compliance may shift from umbrella companies to recruitment agencies or end clients, depending on the structure of the labour supply chain. This proposed shift aims to address an estimated £1 billion tax shortfall and ongoing compliance issues within the umbrella company market. Ultimately, it seeks to make the labour supply chain accountable for ensuring correct PAYE payments.
These considerations come after a series of consultations on labour market compliance which found a substantial shortfall due to non-compliance and tax avoidance schemes affecting 39% of workers working in umbrella arrangements. With this new measure, agencies or end clients would bear liability if there are issues with PAYE payments, even though umbrella companies can still process PAYE. This approach is intended to simplify accountability but introduces new compliance risks for businesses that rely on complex labour supply chains involving umbrella companies.
Following the announcement, Fiona Coombe, Director of Legal and Regulatory Research at Staffing Industry Analysts, reacted with her opinion that “umbrellas may well become redundant in their current form” and that end clients will not want [umbrellas] in their supply chain. This perspective underscores the need for businesses to reassess their current arrangements and consider alternative solutions.
Reinvention in the Umbrella Market
As end clients or recruitment intermediaries, businesses now need to adapt. For companies concerned about the compliance and liability challenges posed by this new policy, Worksome offers a streamlined, automated solution to manage contingent workforce needs without the risks associated with traditional umbrella company arrangements. Morten Petersen, CEO at Worksome, comments, “We chose to take on the responsibility of being the Employer of Record in the UK market right at the very beginning of us operating here. This approach removes unnecessary risk and administration from our supply chain, protecting both our clients, our workers as well as Worksome”.
Many Worksome customers in the UK market have already chosen to eliminate usage of umbrella companies in their supply chain with Worksome’s capabilities - which means no change is needed next year in light of the UK Budget announcement.
For companies seeking to adapt, here’s how Worksome can support your business under the new regulatory landscape:
- Direct compliance and reduced liability exposure: Worksome directly handles worker classification and directly employs the contract worker, taking responsibility for PAYE. This approach mitigates your business’s exposure to potential PAYE issues that could arise under the new regulations.
- Simplified workforce management: Worksome eliminates the need for multiple intermediaries, creating a direct link between companies and contractors. This offers clear, centralised oversight, ensuring compliant payroll processing while reducing administrative burdens.
- Future-Proofing against regulatory shifts: As the UK continues to refine labour market regulations, Worksome provides a proactive solution. By adopting a centralised operation that prioritises worker compliance, companies are protected against change in associated legislation, such as the recently proposed Employment Rights bill.
With this PAYE responsibility shift just over one year away, businesses have plenty of time to pilot and implement a better way of managing contractors Inside IR35 and on PAYE. The old/existing way with umbrellas has been fraught with non-compliance, loses transparency over payments, and ruins the candidate experience in perhaps one of the most important aspects of how companies work with workers; the payment. At Worksome see this as a huge opportunity for companies to drastically improve compliance, speed-to-hire/time-to-productivity, and worker experience.