Budget 2026: what does it mean for UK contingent workforces?

The Budget did not contain any significant announcements in relation to contingent workforces. However, there were several specific measures that will affect how businesses engage and pay temporary staff and contractors, including future reform of non-compete clauses and National Minimum Wage increases. More detail is expected in relation to a number of anticipated reforms, including on umbrella company regulation, guaranteed-hours and short-notice shift rights. 

VAT exemption for medical deputies to end in 2027

The government will amend Group 7 of Schedule 9 to the Value Added Tax Act 1994 in Finance Bill 2026-27 to remove the VAT exemption for a supply of a deputy for a person registered in the register of medical practitioners. 

From 1 May 2027, such supplies will be subject to the standard rate of VAT. The change follows the First-tier Tribunal’s decision in Mainpay Ltd v HMRC (2024), which found that supplying a medical deputy through a staffing intermediary could qualify for the medical-care exemption. The government considers that outcome inconsistent with the intended scope of the exemption and is legislating to reverse it.

The government has indicated that deputising services will remain exempt where their primary purpose is to provide medical care. The distinction between supplying a deputy, which will be standard-rated, and providing a medical-care service, which may remain exempt, will therefore be important. 

Businesses supplying or engaging medical deputies through intermediaries will want to review their VAT treatment, pricing and contractual arrangements ahead of the change, particularly where they have relied on Mainpay to treat the supply of medical deputies as VAT exempt. The boundary of the medical-care carve-out remains uncertain until HMRC provides further guidance.

Non-compete clauses: reform is coming

The government has confirmed that it intends to legislate to limit the use of non-compete clauses in employment contracts, with the aim of helping start-ups and growing businesses recruit talent and making it easier for workers to move between jobs. The stated primary driver of this reform is protecting start-ups and high-growth businesses from being locked out of talent by non-competes but the government has said the reforms are intended to apply across the economy. The government will consult on the wider use of restrictive practices before setting out its detailed position, expected in early 2027. 

The final scope of the changes is not yet clear. Businesses, particularly those operating in the start-up and scale-up sectors, should review whether their existing non-compete provisions are proportionate and keep the consultation under review. Umbrella companies (and end users and agencies requiring the flow down of restrictions into contracts with "opted out" umbrella workers), will be affected by these changes. Given the stated objective, it is likely that the limitations will extend to non-compete clauses in contractor engagements.   

National Minimum Wage increases: contingent workforce costs to rise in 2027

From 1 April 2027, the National Living Wage will rise by 3.9% to £13.21 an hour. The National Minimum Wage will increase to £11.27 for 18 to 20-year-olds and £8.31 for 16 to 17-year-olds and eligible apprentices. Around 2.3 million workers are expected to benefit.

For contingent workforce arrangements, the increases are likely to put pressure on assignment costs, particularly in lower-paid roles and age-dependent workforces. Agencies and other employers should check that pay rates meet the new minimums and factor the increase into payroll and assignment planning. Hirers should review budgets and supply-chain contracts ahead of April 2027: higher pay costs may require changes to charge rates, although the impact will depend on the contractual arrangements. 

Tackling tax avoidance

The government plans to consult on tackling both the promotion and use of tax avoidance arrangements. The existing Promoters of Tax Avoidance Schemes (POTAS) rules are mainly directed at those who design or market schemes. The consultation may consider whether, and in what circumstances, users of tax avoidance schemes should also face consequences. This could be relevant to agencies and end-clients which rely on tax avoidance (sometimes operated via non-compliant umbrella companies) to reduce staffing supply chain costs, as well as workers participating in schemes. The consultation may also consider how users can be protected from being left without practical recourse if a promoter becomes insolvent or dissolves. 

Separately, the Finance Bill 2026–27 is expected to amend the existing POTAS regime, with a focus on promoters. The government has also announced plans to recruit 670 additional HMRC compliance officers, extension of data gathering and third-party reporting, use of AI, and new debt collection powers, together with measures aimed at narrowing the tax gap.

Businesses across the contingent workforce supply chain should monitor the consultation and ensure their due diligence identifies arrangements that may involve tax avoidance. Any future action against users will depend on the detail of the proposals and subsequent legislation.

Public procurement

From March 2027, a new National Procurement Policy Statement is expected to require at least 3% of the workforce on large government construction and infrastructure projects to be apprentices. The government also plans to publish a new definition of "UK supplier" by January 2027. Further detail will be important: businesses will need to understand which projects and workers count towards the apprenticeship target, how compliance will be measured, and how the new "UK supplier" definition will be applied in procurement decisions.

These changes could affect more than the main contractor. Agencies, subcontractors and other labour-supply businesses supporting major public projects may be asked to help meet apprenticeship targets, provide workforce information or demonstrate how their services contribute to the project’s obligations. 

Businesses should start assessing which public-sector contracts may be affected, whether their workforce plans can support the proposed target, and what information they may need to provide to clients. The new “UK supplier” definition may also influence how suppliers are treated in public procurement, so staffing intermediaries and subcontractors should monitor the detail as it emerges.

NHS agency spending falls

The Budget reported that NHS agency expenditure fell by £900 million (being 43%) in 2025-26 compared with the previous year. This is a substantial reduction in spending through agencies, but it does not necessarily show the full change in the NHS’s use or cost of temporary staff. The NHS's use of its own internal “bank” workforce to fill shifts is not included in the agency expenditure. Use of bank staff is not always less costly than agency-supplied staff and in short-notice shift situations, the cost of bank staff can actually be much higher. Without a fuller picture of bank spending and staffing volumes, the overall saving (or not) on flexible staffing is difficult to assess.

For staffing businesses, the figures point to a continuing shift in how the NHS sources temporary labour, rather than necessarily a reduction in demand for it. Agencies may face greater competition from internal banks and changes to procurement arrangements, but the headline fall in agency expenditure alone does not establish that the NHS’s overall flexible workforce costs, or need for temporary staff, have fallen by the same amount. Suppliers should monitor how NHS organisations are managing bank and agency staffing and consider whether their services can support or complement those models.

What is absent: updates awaited by the sector 

Umbrella company regulation: consultation response awaited 

Budget 2026 announced no further measures on umbrella company regulation, and the government has yet to respond to its consultation (which closed on 1 May 2026) on bringing umbrella companies within the Conduct of Employment Agencies and Employment Businesses Regulations 2003. 

The proposed reforms included extending the Conduct Regulations to umbrella companies and giving the Fair Work Agency powers to close non-compliant businesses and ban directors. 

For compliant umbrella companies that have invested in meeting their obligations, the delay on the consultation response prolongs uncertainty about how regulation will address non-compliant competitors.

Guaranteed hours reform: no commencement date confirmed

Although the government announced changes in the implementation timetable for the Employment Rights Act, there is not yet a date for the introduction of the new rights in respect of guaranteed hours, reasonable notice and payment for shift cancellation. The timing "will be updated following the consultation process". The Budget 2026 brought no new detail on this. 

Although the government is still consulting on the detail of how those rights will work, the Budget did confirm that the Finance Bill 2026–27 is expected to provide that shift cancellation payments to agency workers are taxable as employment income from 6 April 2027. This is a practical indication that the short-notice payment framework (and guaranteed hours framework) is still progressing. 

For businesses using agency workers, the message is to start planning now. Qualifying agency workers are expected to be offered contracts reflecting the hours they regularly work, and agencies will need to make statutory short-notice payments to eligible agency workers. That will require changes to workforce planning, payroll, processes and supply-chain arrangements. For businesses that have built their operating models around maximum scheduling flexibility, this represents a fundamental shift: workforce planning, contract structures and supplier agreements will all need revisiting well in advance. 

IR35: no news

While there was plenty of discussion around the proposal to remove IR35 if the Conservatives were to be elected, as predicted, the Budget did not comment on or change the IR35 regime.

However, the likelihood is that the rules will soon be enforced. The first formal assessments under the off-payroll rules in the private sector are now anticipated, meaning businesses that have been less than thorough in evidencing their status determinations face uncomfortable questions if asked to justify certain outside IR35 determinations.

Organisations engaging personal service company (PSC) contractors, whether directly or via an agency or consultancy, are well served by status determination statements that are robust, properly evidenced, passed down to contractors and consistently applied and reviewed with a clear, documented audit trail for all off-payroll engagements. 

Employment status consultation

While the Budget is silent on employment status, the government launched the employment status reform consultation earlier this month. 

This proposes a revised "worker" test for employment law purposes, to ensure that the presence of significant direction or control would show that an individual has status as a  "worker" rather than as self-employed; contractual substitution rights would no longer automatically rule out "worker" status; and the burden of proof in a status claim would shift to the engager who would have to show that the individual was not a "worker". 

The proposals also include potential penalties for repeat misclassification, a role for the Fair Work Agency in bringing cases, and written terms for genuinely self-employed people. The consultation closes on 8 January 2027. 

These are proposals, not law. However, a broader worker definition could increase the number of people, particularly gig workers, who qualify for employment rights such as National Minimum Wage and holiday pay. Businesses engaging self-employed individuals and contractors should  keep the issue under review and consider whether their arrangements demonstrate genuine independence, particularly where the engager (whether as an end user or via a gig worker platform) exercises significant control.

Osborne Clarke comment

Although the Budget did not bring any major announcements for the contingent workforce sector, the  consultation on tackling tax avoidance schemes and plans to use AI to find more effective ways of identifying and pursuing tax non-compliance will affect staffing supply chains. Some changes are already in force, while others remain proposals or are subject to consultation. Businesses should distinguish between what they need to comply with now and what they need to plan for.

The extension of liability for umbrella PAYE failures and the government’s proposed focus on the users of tax avoidance arrangements underline the importance of effective supply-chain oversight. Businesses should be confident they understand who is involved in their labour supply chains, how workers are paid and taxed, and whether their due diligence and contractual protections reflect the risks. This is particularly important where an arrangement appears unusually favourable or lacks transparency, or where the commercial terms are not sufficient to fund a compliant supply chain.

Other changes could affect the pricing of contingent workforce models. Minimum wage increases will put pressure on assignment costs, while the medical deputy VAT change will require affected businesses to review their pricing and contractual arrangements. 

While there has been no further announcement on guaranteed hours and short notice shift rights, these remain on the government’s agenda, although their timing is still to be confirmed. These reforms need to be understood alongside the government's employment-status consultation because any changes to the statutory test of who is a "worker" will also affect who qualifies for employment rights, such as guaranteed hours rights for zero-hours and low-hours workers and short-notice cancellation fees.

For hirers, agencies, umbrella companies and other suppliers, the practical priority is to review current arrangements and identify where changes may be needed. Early planning can help businesses assess the effect on costs, workforce models and supply-chain responsibilities and respond more effectively as the government provides further detail.