Costs and Compliance: the negotiation should start today for your agency

This is a guest blog by Business partner SafeRec

The 2024 Autumn Budget has introduced significant changes that will impact recruitment agencies across the UK. With the planned increase of Employer National Insurance (NI) contributions and the national minimum wage, agencies will face challenges in maintaining margins, ensuring compliance, and preserving relationships with clients and workers. This article unpacks these changes, examines their implications, and explores how agencies can turn compliance into a competitive advantage in a demanding market.

Employer National Insurance: The compounding effect

The budget’s changes to Employer NI contributions are at 2 levels and suffer from a negative compounding effect. First, the NI rate is increasing from 13.8% to 15%, an 8.67% rise. At the same time, the threshold for Employer NI contributions is being reduced from £9,100 annually to £5,000. This significant 45% drop means that more of a worker’s wages will now fall within the taxable band.

Agency PAYE

For agencies that directly employ workers, the impact is clear. These costs will directly affect agency margins unless addressed through negotiations with clients. For example, consider a worker earning £25 per hour PAYE (£28.02 including holiday pay) and working 37.5 hours per week. With the Employer NI changes the cost to the agency for this worker will increase by £22.34 per week, or £96.79 per month. Over a year, this results in an additional cost of £1,161.44 per worker, a significant 18.48% rise in Employer NI contributions for the agencies.

These additional costs will strain agency finances without prompt and open discussions with clients. The compounding effect will erode margins and will potentially destabilise agencies' profitability and operations.

Umbrella PAYE

The situation differs for agencies that engage workers through umbrella companies. In these cases, the agency pays the umbrella company an assignment rate, which includes employment costs. The umbrella company deducts its margin and calculates the worker’s gross pay after deducting employer costs based on UK tax laws.

This arrangement means that the Employer NI increase reduces the worker’s gross pay and does not impact the agency’s margins (This is not true for low-income workers, but we will discuss this in the second part of this article). Using the same example of a worker earning the equivalent of a £25 PAYE rate, the worker’s net pay will decrease from £787 to £775.76 per week, a reduction of 1.43%. While this minimises financial stress on agencies, it is still critical for agencies to communicate openly with workers and speak with clients to negotiate higher assignment rates to maintain the worker’s net pay post-April 2025.

2.National Minimum Wage Increase: Amplifying the pressure

The rise in the National Minimum Wage presents another layer of complexity, particularly for agencies operating in sectors reliant on low-income workers, such as blue-collar industries. For agencies employing workers directly, this change means increasing PAYE rates to remain compliant, which significantly raises costs when combined with the Employer NI hike.

The impact for agencies working with umbrella companies is similar but with an additional step. Umbrella companies will need to uplift their assignment rates to meet the new minimum wage requirements, and this increase will be passed back to the agency by Compliant Umbrella Companies (If your agency places temporary workers earning the national minimum wage and your Umbrella Company does not get in touch with you before March 2025, you can be sure at 99.99% your workers are engaged in a tax avoidance schemes, and this percentage is conservative).

The cumulative effect of these changes can be particularly pronounced in job-driven markets, where vacancies outnumber available candidates. In such markets, end clients often hold significant leverage. Many may resist rate increases, leaving agencies with difficult choices: absorb the higher costs, risk losing the business, or face pressure to cut corners. For agencies unable to secure fair rate adjustments, compliance becomes even more challenging, potentially leading to unsustainable margins or, worse, exposure to non-compliance risks.

The stakes are high. Non-compliance with minimum wage laws carries substantial penalties, both financial and reputational. HMRC has already increased its enforcement efforts, including publicly naming and shaming over 500 businesses for breaches in this area in 2023. For agencies and their clients, non-compliance risks far outweigh any short-term financial relief gained by avoiding the necessary adjustments.

3.The Compliance Imperative: Risks of temptation of cutting corners

The financial pressures introduced by the Autumn Budget may tempt some agencies to consider non-compliant practices. These could include engaging workers through tax avoidance schemes or failing to meet wage and tax obligations. However, such strategies carry serious risks, including intensified scrutiny from HMRC, significant fines, and reputational damage.

With HMRC increasing its compliance activities and focusing on agencies and intermediaries, such as umbrella companies, the risk is higher than ever.

4.Why compliance is a strategic advantage

In a competitive market, compliance is no longer just a legal requirement but an opportunity to differentiate your agency. Recruitment agencies that demonstrate a commitment to compliance and transparency are better positioned to attract, educate, and retain clients. While it is not a silver bullet, it is the only way forward for compliant and honest recruitment agencies. In a landscape where end clients are increasingly aware of non-compliance risks, showcasing your agency’s integrity will set you apart.

Partnering with SafeRec Certified Umbrella Companies is one way to achieve this. Through monthly reports, these companies assure your agency that workers are paid correctly and compliantly. Report you can, in turn send to your clients, protecting both your agency and its clients from the risks of HMRC scrutiny. This is undoubtedly the most efficient way to confidently offer your clients a compliant, transparent solution, building trust and strengthening relationships.

5.Taking Action: What agencies should do next

Recruitment agencies must act now to address the challenges the Autumn Budget poses. Begin by thoroughly reviewing your cost structures to understand the impact of the Employer NI and minimum wage changes on your margins. Proactive engagement with clients is essential. Openly discuss the need for rate adjustments to cover increased costs, emphasising the importance of compliance for protecting all parties involved.

As mentioned above, working with SafeRec Certified Umbrella Companies is also a way to increase your negotiation success rate by demonstrating compliance to your clients. These partnerships provide the transparency and assurance needed to navigate this complex regulatory environment. By prioritising compliance, you can protect your agency from legal and financial risks and position it as a trusted partner in the supply chain.

Educating your internal teams is another important step. Ensure your staff understand the implications of the budget changes and can effectively communicate them to clients and workers. A well-informed team is better equipped to manage these transitions smoothly and build confidence among stakeholders.

6.Transforming challenges into opportunities

The 2024 Autumn Budget introduces undeniable challenges for recruitment agencies but offers a chance to lead with integrity. Agencies can turn these changes into a competitive advantage by addressing the financial impacts head-on, engaging clients in transparent discussions, and prioritising compliance.

SafeRec Certification provides the tools and assurance you need to navigate this new landscape. Don’t view compliance as a burden; embrace it as a strength that differentiates your agency in a crowded market.