Option 3 is coming. In this series of three blog posts, Andrew Webster, our Commercial Director, gives his thoughts on how it could affect recruitment agencies, how they can prepare, and the potential impact on their contractors and end clients.
The landscape is shifting – How Option 3 could change recruitment agencies and umbrella companies
In a move that could reshape the temporary labour market, the UK government has confirmed its intention to implement Option 3 following its Tackling Non-Compliance in the Umbrella Company Market consultation.
The decision looks like a watershed moment for recruitment agencies. A fundamental shift that could have significant implications on liability, compliance and operational structures for those who work with umbrella payroll arrangements within the temporary labour supply chain.
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 recruitment agencies have been used to.
Why is Option 3 being implemented?
The decision to implement Option 3 comes as part of the government’s broader effort to address non-compliance issues within the umbrella company sector. By shifting liability, HMRC aims to incentivise recruitment agencies to demonstrate greater due diligence and oversight, ultimately reducing tax avoidance and protecting workers’ rights.
When do the changes take effect?
The government has scheduled implementation from April 2026, with further updates and clarification expected in July 2025.
Though they have said that they will engage with stakeholders to ensure they have an opportunity to provide feedback on the proposal, the message from the government is clear: substantial change is coming, and recruitment agencies need to be prepared.
How are recruitment agencies responding to Option 3?
So far, the industry’s response to Option 3 has been mixed. While most operators welcome efforts to combat tax avoidance and worker exploitation, there are lingering concerns over the increased administrative burden for agencies as well as the potential liability exposure.
At Parasol, we welcome all efforts to eradicate illegal practices from our sector. We also understand the operational, financial, and reputational implications this proposal may present to agencies.
How could Option 3 impact your recruitment agency?
For recruitment agencies, Option 3 isn’t just a change in the way you work. It’s potentially a shift that presents both challenges and opportunities:
Challenges:
Increased liability exposure: Agencies could bear the financial risk for tax compliance issues, even those occurring at the umbrella company level.
Enhanced due diligence: Option 3 may necessitate a more robust vetting process for umbrella companies.
Operational restructuring: Some agencies may need to reconsider their business models and supply chain arrangements to accommodate Option 3.
Opportunities:
Competitive advantage: Agencies with strong compliance frameworks are likely to be better positioned than their competitors.
Streamlined supply chains: Some agencies may choose to bring payroll in-house or work with fewer, more trusted partners. This will streamline supply chains, reducing complexity and costs.
Enhanced worker protection: The changes could positively impact temporary workers, potentially improving talent attraction and retention within the sector.
Are you ready for Option 3?
April 2026 may feel like a long way off, especially as consultations between industry and government are still ongoing. But the sheer scale of this change and its potential impact on the industry mean that recruitment agencies should start preparing now to ensure that they are ready to navigate Option 3.
Those agencies that act now will not only survive the recalibration but ultimately thrive. That’s why our expert team is working closely with our partners and clients over the coming months to provide guidance, clarity and insight as this evolves.
For agencies committed to transparent operations, this represents an opportunity to demonstrate leadership and build stronger, more sustainable businesses.
So what steps can you take to get ready for the potential impact of Option 3?
There are a few key questions that recruitment agencies should be asking themselves to get ready. Questions like “Do we have a clear picture of our current supply chain?” “How robust are our compliance processes?” And, “what technological and operational changes might we need to implement?” The answers to which, will go a long way to helping your agency chart a course through this changing landscape.
Looking for help getting ready for Option 3? Let’s start the conversation now, because April 2026 will come around fast.
