Don’t PAYE the price for in-house payroll in 2026

If you are a recruitment agency that currently pays contractors through your own payroll, or that’s something you’re considering, now might be the time to reassess.

Over the coming months, the risk profile of having contractors “on the books” is set to change, and recruiters need to carefully weigh up the perceived benefits against mounting liability and costs.  

Day One Rights under the ERB

One of the biggest shifts coming with the Employment Rights Bill is that workers will gain core employment rights from the first day of engagement. These reforms include removing the waiting period and lower earnings threshold for Statutory Sick Pay, parental and bereavement leave from day one, and scrapping the qualifying period for unfair dismissal protection.

While implementation will be phased and subject to consultation, the outcome is clear: every worker on your PAYE will now be entitled to these rights from the very start of their assignment. That means higher costs, greater liability, and more administration for your business.

When you have contractors on your in-house payroll, you’re the legal employer and are therefore responsible for delivering these rights and covering the associated costs from day one. It’s no longer just about the pay rate; it’s about the increasing cost, compliance, and risk your agency will shoulder.

Umbrella Company Regulation

Alongside the ERB, regulation of the umbrella company market from April 2026 has got some agencies thinking “we avoid the umbrella by doing it ourselves”. But this is potentially overlooking a double-hit of risk.

Here’s the legal nitty gritty: 

The draft legislation on the Finance Bill 2025-26 introduces a new Chapter 11 into the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), which will make agencies, and in some cases the end client, jointly and severally liable where an umbrella forms part of the chain.

If there is no umbrella company in the supply chain, that liability doesn’t disappear, it moves up the chain to the end client. HMRC has made it clear that where an umbrella isn’t present, your agency may effectively be treated as one, meaning that you’ll be liable for PAYE, NIC and compliance obligations.

In practice, that means agencies operating in-house PAYE could find themselves on the hook for the same risks and enforcement scrutiny that umbrella companies face, but without the specialist infrastructure, systems and protections in place to manage it. 

“Stride” away from risk

At Liquid Friday, we offer a safer, easier alternative to direct PAYE. We employ the contractor, shielding your agency and end client from direct Chapter 11 exposure while ensuring full compliance with tax and employment legislation. You get the clarity and control you need, without the liability and admin that come with managing payroll in-house.

Within our Stride platform, we’ve built in robust compliance oversight and real-time payslip verification, so you can easily evidence PAYE across your workforce. Every payment is fully traceable, transparent and auditable for your complete peace of mind.  

The latest version of Stride also includes a PAYE vs Umbrella cost calculator. Here you can clearly compare the true cost of paying workers on your own payroll (including agency risk and added costs such as SSP, employment risk, insurance claims, pension management and processing resource) against the fixed umbrella assignment rate paid to Liquid Friday. 

Next steps

If your agency is currently paying contractors through in-house PAYE, here are some practical steps to review your exposure and manage your risk ahead of the upcoming changes:

1. Review your current contractors on in-house payroll. Map your supply chain, contracts and risk exposure.
2. Run the Stride PAYE calculator for your current PAYE model versus umbrella.
3. Engage legal / advisory support to review your employment contracts and processes.
4. Communicate with your clients. Flexibility remains key, but costs and risk are escalating. Be prepared to discuss how to manage it together.
5. Decide whether to continue with in-house PAYE or move contractors to a compliant umbrella provider. 

In short, if your agency engages contractors in-house through PAYE, now is the time to take a fresh look. By proactively reviewing your exposure, running the numbers, and exploring a compliant umbrella solution, you can ensure you’re fully prepared for the changes ahead.