A recent proposal announced in the 2025 Spring Statement has sparked debate by highlighting a potential shift in how contractors are paid, one where recruitment agencies could be required to operate PAYE (Pay As You Earn) for umbrella workers, bypassing compliant umbrella companies altogether. Although this proposal is still under review and has not yet been finalised, it raises serious concerns, particularly for contractors.

While the proposed PAYE shift is currently set for April 2026, it remains under consultation and may be subject to changes or delays. It’s also important to note that this proposal is separate from the ongoing initiative to regulate umbrella companies — a move that continues to receive broad industry support. Even so, it’s important for contractors and agencies to understand what the proposed changes could mean if introduced in their current form.

In this article, we explain why removing PAYE from umbrella specialists risks destabilising contractor employment, what it means for contractors and agencies, and why working with a compliant umbrella company like SmartWork remains the safest and most efficient option for all parties.

The Risk to Contractors

When an umbrella company handles PAYE, contractors benefit from a well-established employment framework, including continuous employment, regular and accurate payments, clear payslips, statutory benefits such as holiday and sick pay, and access to HR support.

By contrast, if agencies were to take on PAYE responsibilities under the proposed model:

Contractors can lose some of their employment rights if they are forced to attain agency worker status instead of employment with an umbrella company.

Payroll errors become more likely. If contractors face dual employment, especially if the agency lacks robust systems or experience, it can lead to unexpected tax bills at the end of the year.

Loss of continuous employment – Contractors with multiple assignments may end up with several employers, as agencies may further restrict their Preferred Supplier Lists. This lack of continuity can cause issues with mortgage applications and credit referencing.

Tax risk increases, particularly if the agency unknowingly operates non-compliant models or cuts corners on deductions and reporting.

Pension disruption and reduced flexibility – Agencies may not offer the same structure for consistent pension contributions or allow voluntary SIPP payments, leaving contractors at risk of under-saving or missing out on employer contributions.

Weakened employment rights oversight – Agencies may lack the expertise umbrella companies have in handling rights like holiday, sick, and maternity pay, increasing the risk of non-compliance and confusion over responsibilities.

What might appear to be just an admin change can diminish a contractor’s sense of security and trust in the supply chain.

The Burden on Agencies

It’s not just contractors who are affected. Under the proposed shift, if agencies were to assume PAYE responsibilities:

They also assume greater compliance obligations, ranging from employment law to HMRC reporting.

They may face increased administrative responsibilities, including managing pensions, holiday pay, sick leave, and employment contracts.

They risk contractor dissatisfaction and possible attrition if payments are delayed or mishandled.

Ultimately, this shift could divert agencies from their core strengths — sourcing talent and managing client relationships — and expose them to unnecessary risk.

Why a Compliant Umbrella Company is a Win-Win

Umbrella companies like SmartWork specialise in contractor payroll. It’s what they do — and we do it well. FCSA-accredited and APSCo Member umbrella companies undergo independent audits to ensure full compliance and transparency.

Working with a compliant umbrella company means:

• Contractors receive the full rights and benefits of employment, including pension, holiday pay, sick pay, and insurance coverage.
• Agencies can reduce their admin and avoid compliance pitfalls.
• Everyone in the supply chain benefits from timely payments, clear communication, and expert support.
• Our role is to simplify contractor employment, not to complicate it.

What Contractors Should Do if Asked to Move to Agency PAYE

If you’re currently working through an umbrella company and your agency suggests moving to in-house PAYE, here are some questions to ask:

• Will I be employed directly or treated as a temp worker?
• What benefits will I lose or gain?
• Who will manage my holiday pay, pension, and sick pay?
• Can I continue using my umbrella if I prefer it?

If you feel unsure or pressured to switch, talk to us first. Our business managers would be happy to explain your rights and how you’d be affected by changes to your pay structure.

Summary

Umbrella companies like ours play a vital role in protecting both contractors and agencies from unnecessary risk. The proposed shift to agency PAYE might seem efficient on paper, but it introduces real risks that could outweigh any administrative benefits.

At SmartWork, we remain committed to providing a secure, compliant, and hassle-free payroll solution that works for everyone in the supply chain.

If you’re a contractor or agency with concerns about PAYE changes, contact our team — we’re here to help.