The UK’s flexible workforce, which contributes £331 billion each year to the UK economy, has been significantly impacted by the first budget under the new Labour government, who have shown a clear lack of understanding of this crucial segment of the economy. 

The rise in employer national insurance contributions (NICs) and the latest attempt to tackle noncompliance in the umbrella market both have the potential to shake up how the flexible workforce operates. This means recruitment agencies will need to grasp the nuances of the changes and how will affect workers, hirers and themselves.

The Issue for Umbrella Employees

The most notable announcement in the budget for the flexible workforce aligns with that for traditional employers: a 1.2% rise in employer NICs and a reduction of the NI secondary threshold to £5,000 from £9,100. Despite government assurances that employee take-home pay will remain unaffected, this outcome seems unlikely for the 700,000 workers employed through umbrella companies.

The rates for umbrella workers are typically determined by agreements between end hirers and recruitment agencies. If these rates fail to adjust to accommodate the rise in employer NI, umbrella companies, which often operate on slim margins, may struggle to shield workers from a decline in take home pay. This creates challenges across the supply chain, as all parties work to avoid financial losses.

Some umbrella employees may push their agencies to renegotiate client charges to protect their pay. Alternatively, they could seek work outside of IR35, reducing the talent pool for agencies that don’t engage with independent contractors. We may even see businesses starting to reconsider their IR35 policies in order to offer contracts outside IR35. With the recent off-payroll rule changes reducing the risks associated with outside-IR35 contracts, this is a practical approach to address rising NICs and talent shortages.

Recruitment agencies will need to be prepared for these eventualities to maintain access to a large talent pool of contractors and freelancers.

Responding to Demand Shifts and Cost pressures

For recruiters, the rise in employer NICs presents significant challenges. Agencies charging clients based on a candidate’s salary may encounter resistance as clients look to cut costs, possibly pressuring recruiters to reduce fees and ultimately impact on agency revenue and profitability. Agencies must communicate the direct impact of increased employer costs on inside-IR35 assignments, stressing that these costs can be avoided if assignments are appropriately categorized as outside IR35.

On a more positive note, the employer NIC rise may encourage clients toward temporary staffing solutions or freelance models as a way to reduce long-term commitments and employer liabilities.

Recruitment agencies should prepare for the potential surge in demand, widening their talent pool by assuring they can offer competitive pay rates and are willing and able to hire outside IR35.

Addressing Noncompliance

The budget also pledged to tackle noncompliance in the umbrella company market — a step long advocated by compliant industry players to eliminate unscrupulous umbrella companies and encourage the use of compliant providers.

Any recruitment agency using an umbrella company to engage a worker will face new legal responsibilities under the proposed changes. The agency supplying the worker to the end client will be held accountable for operating PAYE on the worker’s pay and will be liable for any shortfalls, regardless of whether they operate the payroll themselves or rely on the umbrella company for payroll services.

The details of how this system will function remain unclear, with further consultations on draft legislation expected in the coming months. Any changes are unlikely to take effect before April 2026.

In the meantime, recruiters can mitigate risks by establishing a preferred supplier list of compliant umbrella companies and conducting thorough due diligence before and during their partnership with trusted providers. It is essential that measures have already been implemented to ensure the accuracy of PAYE and NI calculations, particularly when these are handled by the umbrella company, before April 2026. Reviewing IR35 policies to ensure independent contractors are correctly classified and engaged outside of off-payroll rules is also advisable.

What’s Next?

The Budget could be a pivotal moment for the flexible workforce model and these developments will demand a proactive approach: Agencies must adapt to shifting cost structures, address worker concerns about take-home pay and navigate evolving regulatory requirements.