Option 3 is coming. In this blog, Andrew Webster, our Commercial Director, gives his thoughts on how recruitment agencies can prepare – and the potential impact on their end clients.
How Option 3 could change recruitment agencies and end clients
It’s a move that could reshape the temporary landscape as we know it. A sea change that will not only impact recruitment agencies, but also end clients. We are, of course, talking about the UK government’s decision to pursue Option 3 in response to the Tackling Non-Compliance in the Umbrella Company Market consultation.
If it comes into effect, Option 3 would represent a significant departure from the way temporary labour has been managed to date. As a result, both recruitment agencies and end clients need to be prepared to navigate the changing compliance landscape and avoid disruption.
What is Option 3?
Under Option 3, recruitment agencies (or end clients where no agency is involved) will be deemed the employer of temporary workers for tax purposes. That means the agency will become ultimately responsible for ensuring the correct operation of PAYE, regardless of whether they use umbrella companies in their supply chain. This would represent a significant shift in responsibility from the norms that we’ve all been used to.
Why is Option 3 being implemented?
The decision to implement Option 3 comes as part of the government’s broader efforts to address non-compliance issues within the umbrella company sector. The thinking is that by changing who is liable for PAYE, recruitment agencies will be incentivised to be more diligent and help to reduce tax avoidance without compromising workers’ rights.
When will the changes take effect?
At the time of writing, the implementation of Option 3 is due to commence in April 2026. However, consultations are still ongoing, and we expect to see updates and clarification to the current plans as soon as July this year.
The exact detail remains to be seen. But one thing that’s clear is that change is coming, which means recruitment agencies and end clients need to be prepared.
How Option 3 could change temporary labour
If and when Option 3 is implemented, the traditional benefits that are associated with temporary labour will change. Historically, for end clients, one of the biggest advantages of using recruitment agencies to engage temporary workers is flexibility. Or, more specifically, the opportunity to access skilled labour without the costs and responsibilities that are usually associated with employees.
In essence, end clients could focus on their core business activities while recruitment agencies and umbrella companies handled payroll, tax obligations, and employment law compliance.
However, with Option 3 on the horizon, this hands-off approach is becoming less viable. If it is implemented in its current form, end clients will need to take a more hands-on role in ensuring compliance throughout their temporary labour supply chains.
For end clients who engage temporary workers directly without using recruitment agencies, the impact will be most significant. These businesses will become directly responsible for operating PAYE correctly and ensuring accurate tax and National Insurance deductions.
On the other hand, end clients who work through recruitment agencies will largely avoid direct PAYE responsibilities under Option 3. However, this doesn’t mean they can remain completely passive. The new regulations will likely require end clients to demonstrate due diligence in their supplier selection and ongoing monitoring processes.
Preparing for Option 3: What should end clients do?
April 2026 may feel like a long way off, but now is the time to get your house in order to ensure you are ready for Option 3. So what should end clients do to prepare for implementation? If you use temporary labour either directly or through a recruitment agency, these are some things you should be thinking about:
Audit your supply chain – Begin by conducting a comprehensive review of your existing temporary labour arrangements. Identify all parties involved, understand their roles and responsibilities and assess potential compliance risks.
Develop compliance frameworks – Create robust procedures for things like supplier onboarding, due diligence, documentation and record-keeping.
Get help – Option 3 is going to be a big adjustment so consider working with compliance specialists, employment law experts, or established payroll providers who understand the complexities of the new regulatory environment.
Plan ahead – Develop a clear timeline for implementing necessary changes including system updates, staff training and process modifications.
Are you ready?
While the timeline of its implementation and exact form it will take remain to be seen, the government is committed to pushing through Option 3.
Given the sheer scope and scale of this change it’s vital that end clients stay up to date with developments and plan ahead to ensure they are prepared for when changes come into effect.
Success in this new environment will require active engagement, robust due diligence and a commitment to compliance. The businesses that adapt quickly and thoroughly to these changes won’t just ensure they are on the right side of regulations but get ahead of competition who are less prepared.
Looking for help getting ready for Option 3? Let’s start the conversation now, because April 2026 will come around fast.
