The Finance Director's Guide to Labour Cost Changes: Modelling the Impact of 2026 Legislation

The UK contractor landscape is facing one of its most significant regulatory shifts in recent years. For Finance Directors managing contingent workforces, the changes coming into effect between April 2025 and October 2026 are fundamental shifts in labour cost structures that demand strategic financial planning.

Understanding the 2025-2026 Legislative Changes

Four major legislative shifts are reshaping the contractor cost landscape, each creating distinct financial implications for organisations relying on flexible workforces.

1. Employer National Insurance Changes (April 2025 - Already in Effect)

The Autumn 2024 Budget delivered a significant blow to labour costs. From April 2025, two critical changes came into effect:

• Rate increase: Employer NI contributions rose from 13.8% to 15%
• Threshold reduction:The secondary threshold dropped from £9,100 to £5,000 per annum

For a contractor earning £50,000 annually, the employer NI cost increased by approximately £865 per year, a 1.73% rise in labour costs per contractor. Scale that across a workforce of 100 contractors, and you're looking at an additional £86,500 in annual costs.

The Employment Allowance has increased to £10,500 (from £5,000) to provide some relief, but for organisations with substantial contractor workforces, this offers limited protection against the overall cost increase.

2. National Living Wage Increase (April 2026)

The National Living Wage is projected to increase from £12.21 to approximately £12.71 per hour from April 2026, representing a 4.1% rise. The Low Pay Commission has provided estimates ranging from £12.55 to £12.86, with the final rate to be confirmed following their October 2025 recommendations.

Financial implications:

• Approx. £975 annual increase per contractor on minimum wage (37.5 hrs/week)
• 4.1% rise at entry level may drive upward pressure across pay bands
• Higher regional costs where the Real Living Wage (£13.45 in London) applies

3. Umbrella Company PAYE Accountability (April 2026)

From April 2026, recruitment agencies will become legally responsible for PAYE compliance when workers are engaged through umbrella companies. If an umbrella provider fails to correctly deduct and pay tax, the liability transfers to the agency or directly to the end user if there's no agency in the contractual chain. 

This shift addresses the £2.8 billion tax avoidance problem within the umbrella sector, but it fundamentally changes risk allocation. Agencies will demand higher margins to absorb this liability, costs that will inevitably flow through to end users.

Financial implications: 

• Expect 2-3% margin increases from agencies managing umbrella arrangements
• Enhanced due diligence requirements adding administrative costs
• Potential for retrospective liability if historical umbrella arrangements prove non-compliant

4. Employment Rights Bill Changes (April & October 2026)

The Employment Rights Bill introduces sweeping changes affecting contractor and employee costs:

April 2026 changes:

• Statutory Sick Pay becomes a day-one right, with the lower earnings limit removed
• Paternity leave and unpaid parental leave available from day one
• Collective redundancy protective awards double from 90 to 180 days' pay
• Fair Work Agency established with enforcement powers over holiday pay

October 2026 changes:

• Tribunal time limits extend from 3 to 6 months
• Fire and rehire becomes automatically unfair dismissal in most cases
• Day-one unfair dismissal rights (subject to statutory probationary periods)

While many of these changes target permanent employees, they create cost pressures that make contractor solutions relatively more attractive but also increase compliance risks for organisations not managing contractor relationships properly.

Taking Action: Your 2026 Preparation Roadmap

Finance Directors should begin preparation immediately, even though some changes don't take effect until October 2026.

Immediate Actions (Now)

1. Audit current contractor spend - Establish baseline costs and contractor numbers
2. Map agency and umbrella relationships - Identify all parties in your contractor supply chain
3. Calculate projected cost increases - Use your current contractor spend and the legislative changes outlined above to project 2026 labour costs.
4. Assess umbrella compliance - Conduct due diligence on current umbrella arrangements

Short-term Actions (Next 3-6 Months)

1. Review contractor engagement policies - Ensure IR35 assessments are defensible
2. Evaluate consolidated contractor solutions - Assess whether a streamlined contractor management delivers value
3. Engage with agencies - Discuss how they're managing April 2026 PAYE accountability
4. Budget for cost increases - Incorporate projected increases into 2026-2027 financial planning

Medium-term Actions (6-12 Months)

1. Implement chosen contractor solution - Whether consolidated contract recruitment, enhanced supply chain management, or strengthened in-house capabilities
2. Train procurement and hiring teams - Ensure stakeholders understand new compliance requirements
3. Establish monitoring and reporting - Create dashboards tracking contractor costs and compliance
4. Prepare for Fair Work Agency - Ensure documentation and processes meet expected enforcement standards

How Owen Daniels Can Help

For over a decade, Owen Daniels has guided organisations through complex workforce challenges. Our contract recruitment services provide fast, scalable, and compliant contractor solutions, supported by efficient admin, payroll, and timesheet management to bring clarity and control to your operations.

We've helped Finance Directors:

Reduce contractor costs through consolidated invoicing and volume pricing

• Eliminate compliance risk through robust due diligence and audit trails
• Gain real-time visibility of contractor spend through integrated technology platforms
• Free up finance teams from processing hundreds of individual contractor invoices

The legislative changes rolling out between April 2025 and October 2026 will increase contractor labour costs. For organisations without preparation, these increases could reach 10-15% of total contractor spend.