The 2026 Contractor Classification Checklist Every Leader Needs

Contractor compliance in the UK has become increasingly complex. Between IR35, umbrella company regulations, and PAYE obligations, business leaders need to understand their responsibilities across all engagement models.

This guide breaks down what you need to know for each contractor type and provides a practical checklist to keep your organisation compliant in 2026.

Understanding Your Contractor Landscape

Before diving into specific obligations, you need to understand how contractors are engaged across your organisation.

Each engagement model carries different obligations and risks. Many organisations don't realise they have a mix of all three until they conduct a thorough audit.

First Action: Map your entire contractor workforce. Which engagement model is each contractor using? Who is responsible for their payment? Are you engaging directly or through agencies?

The Stakes: What Happens When You Get It Wrong

Non-compliance across any of these models can result in:

• Back-payment of taxes and National Insurance contributions
• Penalties and interest charges from HMRC
• Administrative burden of investigations
• Reputational damage
• Strained contractor relationships

The financial impact can be substantial. Inside IR35 determinations alone can increase your costs, but incorrect classifications or failing to comply with umbrella regulations can expose you to even greater liability.

Are You Even Responsible?

Not all businesses are caught by these regulations.Take our IR35 Exemption quiz here to check if the rules apply to your organisation.

For responsible businesses, here's what you need to know for each engagement model:

Personal Service Companies & IR35

When This Applies: When contractors work through their own limited companies and your organisation is not small.

Your Core Obligations 

1. Make IR35 Status Determinations

You must assess whether each PSC contractor would be an employee if it weren't for their limited company. This determines if they're "inside" or "outside" IR35.

How to Determine Inside vs Outside IR35

IR35 status depends on the actual working relationship, not just contract terms.

Tools to Help

• HMRC's CEST tool- Free, but has limitations and won't give determinations for complex cases
• Commercial tools- Like Owen Daniels' platform, which combines automation with expert review for borderline situations

2. Issue Status Determination Statements (SDS)

For each contractor, you must provide:

• Your determination (inside or outside IR35)
• The reasoning behind your decision
• Details of the engagement
• Information about your disagreement process
• The law requires a formal process allowing contractors to challenge determinations. You must respond within 45 days and have clear escalation procedures.

3. Maintain a Disagreement Process

The law requires a formal process allowing contractors to challenge determinations. You must respond within 45 days and have clear escalation procedures.

4. Keep Detailed Records

Document every determination, the assessment process, SDS distribution, and any disputes. These records are critical during HMRC investigations.

Key Point: HMRC will look at actual working practices over contract terms. If your contract says a contractor can send a substitute, but you've never allowed it, HMRC will likely determine them inside IR35.

Ongoing Obligations 

• Quarterly reviews of contractor engagements to catch changes in working practices
• Annual audits of your entire IR35 process
• Training for hiring managers on IR35 responsibilities
• Contract alignment - ensuring terms match reality

Umbrella Companies

When This Applies: When contractors are employed by an umbrella company that pays them on your behalf. Many organisations assume umbrella arrangements shift all responsibility away from them. This is incorrect.

Your Core Obligations

1. Know Who the Umbrella Company Is

You must identify which umbrella companies are in your supply chain. If working through agencies, ask:

• Which umbrella companies do they use?
• Are these umbrellas compliant?
• How are they monitoring umbrella compliance?

2. Conduct Due Diligence

Under the 2024 umbrella company regulations, you must ensure umbrellas meet minimum standards. Check:

• Are they paying at least National Minimum Wage?
• Are they properly accounting for employment costs?
• Are they transparent about deductions?
• Are they registered with HMRC?
• Do they hold appropriate insurance?

3. Audit Regularly

Umbrella company compliance isn't a one-time check. Implement:

• Regular reviews of umbrella companies in your supply chain
• Spot checks of contractor payslips
• Annual audits of agency umbrella arrangements
• Monitoring of umbrella company changes
• Umbrellas offering "take-home pay" that seems too good to be true
• Complex payment structures you don't understand
• Umbrellas that are reluctant to provide transparency
• High volumes of contractors suddenly switching umbrellas

Key Point: Non-compliant umbrella companies create liability for you. If an umbrella fails to pay correct taxes, HMRC can pursue the end client.

4. Supply Chain Responsibility

If you engage contractors through agencies who place them with umbrellas, you remain responsible for ensuring those umbrellas are compliant. Your contract with agencies should specify umbrella compliance requirements.

Red Flags to Watch For:

• Umbrellas offering "take-home pay" that seems too good to be true
• Complex payment structures you don't understand
• Umbrellas that are reluctant to provide transparency
• High volumes of contractors suddenly switching umbrellas

Key Point: Non-compliant umbrella companies create liability for you. If an umbrella fails to pay correct taxes, HMRC can pursue the end client.

PAYE Contractors

When This Applies: When contractors are paid through your payroll or an agency's payroll as employees.

Your Core Obligations

1. If Using Your Own PAYE

You have standard employment obligations:

• Operating PAYE correctly
• Paying employer's National Insurance
• Providing employment rights (holiday pay, pension, etc.)
• Meeting National Minimum Wage requirements
• Maintaining proper employment records

2. If Using Agency PAYE

Even when agencies handle PAYE, you must:

• Verify agencies are operating PAYE correctly
• Conduct supply chain audits
• Ensure proper contracts are in place
• Monitor for employment rights issues
• Check agencies have appropriate insurances

3. Agency Workers Regulations

After 12 weeks, PAYE contractors through agencies are entitled to equal treatment with your permanent employees regarding:

• Pay (unless you can justify differences)
• Working conditions
• Access to facilities and amenities

Ongoing Obligations

• Payroll audits- Regular checks that PAYE is being operated correctly
• Supply chain monitoring- Ensuring agencies are compliant
• Record keeping- Maintaining documentation of contractor engagements
• Rights management- Tracking 12-week thresholds for agency workers

Your 2026 Compliance Checklist

Use this checklist to ensure you're meeting obligations across all contractor types:

Quarterly Actions

☐ Review all contractor engagements for changes in working practices
☐ Audit sample of IR35 determinations
☐ Check umbrella company compliance in supply chain
☐ Verify PAYE contractors aren't approaching 12-week thresholds inadvertently
☐ Review contractor population for hidden risks

Annual Actions

☐ Conduct comprehensive contractor workforce audit
☐ Review all IR35 Status Determination Statements
☐ Audit agency compliance across all engagement models
☐ Update contracts to reflect working practices
☐ Train hiring managers on contractor compliance
☐ Test disagreement process effectiveness
☐ Review and update compliance procedures

Ongoing Actions

☐ Maintain detailed records of all determinations and engagements
☐ Monitor for red flags (umbrellas, payment structures, working practices)
☐ Ensure SDS distribution for all new PSC engagements
☐ Keep supply chain informed of compliance requirements
☐ Track legislative changes and update processes accordingly

How Owen Daniels Can Help

At Owen Daniels, we've been supporting organisations with contractor compliance for over a decade. As specialists in STEM recruitment, we understand the unique challenges of managing technical contractor workforces.

Need help navigating contractor compliance? Owen Daniels offers comprehensive support covering IR35, umbrella regulations, and PAYE obligations. Our team of STEM recruitment specialists can help you understand your responsibilities and implement robust compliance processes.

Contact us today to discuss how we can support your contractor compliance journey in 2026.