HR and payroll for recruitment agencies in the United Kingdom
Reviewed by Mellow Editorial Team, HR & payroll content team
Recruitment agencies face a more complex payroll picture than most UK employers. You are typically running parallel workforces — permanent staff on your own books, contractors on fixed-term assignments, and temporary workers paid weekly or even daily — each with different tax treatment, employment status rules and reporting obligations.
Employment status: getting the foundations right
Before you process a single payslip, you need to know how each worker is engaged. The three categories that matter most are:
Employees and workers. Temporary workers supplied to clients are almost always workers or employees for employment law purposes. They accrue statutory annual leave (5.6 weeks, or 28 days including bank holidays for a five-day week), are entitled to Statutory Sick Pay if eligible, and must be enrolled into a pension if they meet the auto-enrolment criteria. The Employment Rights Act 2025 has strengthened day-one rights, so the qualifying periods that once let agencies defer some entitlements are largely gone.
Limited company contractors (PSCs). Where a contractor operates through their own personal service company, IR35 (off-payroll working rules) determines who deducts tax. For assignments inside the private sector, medium and large client businesses are the deemed employer and must assess IR35 status. If your agency sits in the supply chain between the worker and the client, you may be the fee-payer obliged to operate PAYE and National Insurance on payments to the PSC. Get the status determination wrong and HMRC can pursue your agency for the unpaid tax.
Self-employed individuals. Genuinely self-employed workers engaged directly are outside PAYE, but this status is harder to sustain than many agencies assume. HMRC looks at control, substitution and mutuality of obligation. Misclassification carries serious retrospective liability.
Running PAYE for a variable temporary workforce
Temporary placements create payroll volatility that is difficult to manage manually. Starters and leavers happen constantly. Hours vary week to week. Pay rates differ by client, role and shift pattern.
Every payment must be reported to HMRC through Real Time Information. That means submitting a Full Payment Submission (FPS) on or before each payday — not monthly, not in batches at the end of the week. For agencies paying weekly, that is 52 FPS submissions per employee per year.
National Insurance compounds the complexity. Employer NI runs at 13.8 % on earnings above the secondary threshold (category A employees). Employee NI is 8 % up to the upper earnings limit, then 2 % above it. Because temporary workers often join and leave mid-period, you need to apply the correct thresholds pro-rata and make sure your payroll software handles the transitions cleanly.
Holiday pay for temps deserves particular attention. The rolled-up holiday pay model — adding a percentage on top of hourly pay rather than paying it separately when leave is taken — was historically common in agencies but legally uncertain for years. HMRC guidance now permits it in specific circumstances for workers with irregular hours or part-year patterns. If you use rolled-up pay, the rate must be clearly shown on each payslip and calculated correctly against qualifying earnings.
Pension auto-enrolment at scale
Auto-enrolment duties apply to every worker who meets the age and earnings criteria, even if they are only with you for a single assignment. The minimum contributions are employer 3 % and employee 5 % of qualifying earnings.
The administrative burden for agencies is high because enrolment, postponement windows, opt-outs and re-enrolment all need to be tracked per individual. A worker who opts out and then returns for a new placement may need to be re-assessed. Your payroll system must be able to handle this automatically; spreadsheet-based tracking at any reasonable volume is not sustainable.
End-of-year and in-year compliance
The annual cycle adds further obligations. P60s must reach every employee who was on your payroll at 5 April by 31 May. If you provide any benefits in kind — which is less common for temps but does occur for permanent internal staff — P11Ds are due by 6 July.
Throughout the year, keep your records clean on new starter declarations, student loan deduction notices and any attachment of earnings orders, which agencies receive more frequently than average given the transient nature of the workforce.
Contracts and the agency worker framework
The Agency Workers Regulations give qualifying temps the right to the same basic working conditions as comparable direct employees after 12 weeks in the same role with the same hirer. This covers pay rates, working hours, rest breaks and annual leave. You need a system — whether contractual or software-driven — that flags when workers are approaching the 12-week threshold so you can assess and apply equal treatment before you are in breach.
Written contracts matter too. A contract between your agency and the worker, and a separate contract between your agency and the client, both need to accurately reflect the engagement. Ambiguity in these documents is where disputes about employment status and liability tend to start.
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