SiteIt's Tuesday night. You've got three agency engineers on site. One's on the packing lines, one's helping your shift fitter chase a gearbox, and one's doing PPM on the compressors. Same agency. Same sort of rate on your invoice.
Ask each of them how they get paid and you'll get three answers. One is on the agency's PAYE. One is employed by an umbrella company you've never heard of. One works through their own limited company.
Most managers treat that as the agency's business. Some of it is. But each route moves a different bit of risk onto you, and you only find out which bit when something goes wrong.
Agency PAYE: the simple one
Here the agency runs the payroll. HMRC's manual says that where the agency rules apply, "the worker is treated as holding an employment with the agency" for income tax. The agency is then "the employer who must deduct" tax and run PAYE (ESM2039).
For you that's the cleanest route. You pay one invoice. The agency deducts the tax. Your duties are the ones you'd have for any agency worker: the day-one rights and the 12-week rule, plus everything you owe them on safety.
Umbrella: check who's on the hook
An umbrella company is an employer that sits between the agency and the engineer. GOV.UK puts it like this: "the umbrella company employs you and pays your wages through PAYE. It does not find temporary work for you." The agency still does that part (working through an umbrella company).
Two things matter to you here.
First, the money. The rate you pay is the assignment rate. Out of that, the umbrella takes its operating costs, its employer National Insurance, the employer pension contribution and holiday pay. Only then does the engineer see their gross pay. So when a contract engineer tells you the rate sounds good but the money doesn't, they're probably right. Expect that when you set rates. Our post on what agency fees actually pay for breaks the rest down.
Second, the tax risk moved this year. From 6 April 2026*, new rules cover umbrella companies in a labour supply chain. They apply to "money paid to workers on or after 6 April 2026" and to "the agency that has the contract with the end client to supply workers". If there's no agency, they apply to "the end client" (HMRC). HMRC says it can recover any PAYE the umbrella fails to pay from whoever is responsible.
So if you book an engineer through an agency, the agency carries that. If you deal with an umbrella directly, with no agency in the chain, the end client is you.
One more point. Being paid through an umbrella doesn't take the engineer out of the Agency Workers Regulations. Regulation 3 says an agency worker isn't excluded just "because the individual is employed by or otherwise has a contract with one or more intermediaries" (regulation 3). The 12-week clock still runs.
Limited company: the decision may be yours
A contractor working through their own company is where the off-payroll rules, often called IR35, come in. They apply where the worker "would have been an employee if they were providing their services directly to that client" (HMRC).
If your business is medium or large, you have to decide the engineer's status and issue a status determination statement. That's a real job with real liability, and it has its own post on IR35 for hirers. If you're small, the engineer's company makes that call. But "you must confirm your size if asked by the person or organisation you contract with, or the worker."
Two more things change with a limited company.
The Agency Workers Regulations may not apply. An individual isn't an agency worker if the contract makes the hirer "a client or customer of a profession or business undertaking carried on by the individual" (regulation 3). Whether that's true depends on how the work is really done, not on what the paperwork calls it.
And the agency checks can change. Under the Conduct Regulations, a limited company engineer and their company can agree that some of the protections don't apply. If they do, the agency has to tell you before it supplies them (regulation 32). If you hear the word "opt-out", ask what checks the agency has still made on qualifications and experience. Our post on the Conduct Regulations covers what those checks normally are.
Same engineer, different paperwork
Here's our view. The route makes no difference to whether someone can fault-find a servo drive at 3am. It changes who carries the tax risk, which rights the engineer has, and what paperwork you need to keep.
The trouble starts when nobody asks. A good engineer on a long cover job finds their pay doesn't add up, or the umbrella name on their payslip keeps changing. They leave mid-week. Now you're paying overtime to your own team and starting the hunt again, with the line still needing cover. A short conversation at the start costs a lot less.
So ask the agency three questions before anyone starts:
- How will this engineer be paid: agency PAYE, umbrella or their own company?
- If it's an umbrella, which one, and how do you check it runs PAYE properly?
- If it's a limited company, has anyone opted out of the Conduct Regulations, and who's made the IR35 call?
Get the answers in writing. They go in the same file as the engineer's tickets and induction record.
If you're on the other side of this, deciding how to be paid as a contractor, there's a separate guide for engineers.
This is our reading of the HMRC guidance and the regulations. It isn't tax or legal advice, so take advice on your own case.
What to do on Monday
- List every agency and contract engineer on site, with how each one is paid.
- Find any umbrella you pay directly with no agency in between. From 6 April 2026* that PAYE risk sits with you.
- Work out whether you're small, medium or large for IR35, and write it down so you can confirm it when asked.
- Send the three questions to every agency you use, and file the answers.
* The 6 April 2026 start date for the umbrella company PAYE rules is correct as of 28 October 2026. Check HMRC's umbrella company guidance and off-payroll working for clients for the latest.