Most UK contractors work through recruitment agencies. This guide explains how the agency relationship affects your tax, your IR35 status, your payment structure and the contract terms you should watch out for.
The standard contractual structure for a limited company contractor through an agency is:
You typically never see the rate the end client pays the agency. The agency’s margin is the difference between what the client pays and what you receive. Margins vary from 5% (competitive, high-volume placements) to 20%+ (niche or executive roles).
The fee-payer is the entity in the chain closest to your company that is not your company. In most agency arrangements, this is the agency. If the determination is inside IR35, the agency must operate PAYE on your payments. If the determination is outside, the agency pays your company gross and you manage your own tax via your limited company.
If the end client qualifies as “small” under the Companies Act definition (broadly: under 50 employees, under £10.2m turnover, or under £5.1m balance sheet), the IR35 determination responsibility shifts back to you. The agency does not deduct PAYE; you self-assess your own status. This is an important distinction — ask every agency whether the end client is small or medium/large. See our full IR35 guide for contractors.
Some agencies apply blanket inside-IR35 determinations to all contractors regardless of the actual engagement. This is usually driven by the agency’s risk appetite, not by a genuine assessment of your working practices. A blanket determination does not meet the “reasonable care” standard required by law. You have the right to challenge it — see our inside IR35 options guide for how to build your case. If the agency refuses to pass on your challenge to the client, escalate directly to the end client in writing.
Agencies typically offer three payment options. The right choice depends on your IR35 status and whether you already have a limited company:
| Option | How It Works | Best When | Take-Home (on £500/day) |
|---|---|---|---|
| Ltd company (outside IR35) | Agency pays your company gross. You run salary + dividends | Outside IR35, long-term contracting | ~£370/day |
| Ltd company (inside IR35) | Agency deducts PAYE before paying your company net | Inside IR35 but keeping Ltd for other contracts | ~£320/day |
| Umbrella | Umbrella employs you, invoices agency, pays you net salary | Inside IR35, short contracts, zero admin | ~£315/day |
| Agency PAYE | Agency employs you directly on their payroll | Very short engagements, no company needed | ~£310/day |
Take-home estimates assume 2026/27 tax rates, 230 working days, £5,000 annual expenses (Ltd only), optimal £12,570 salary. Use our Ltd vs PAYE calculator for your exact figures.
For a detailed comparison of limited company and umbrella with worked examples at every income level, see our umbrella vs limited company guide.
Your contract with the agency is a critical document. It governs your payment, your IR35 position, and your rights if things go wrong. Watch for these clauses:
Many agency contracts include a clause preventing you from working directly for the end client (cutting out the agency) for 6–12 months after your agency contract ends. This is standard and generally enforceable. What is not standard is a clause preventing you from working for any of the agency’s other clients, or from registering with competing agencies. Push back on overly broad restrictions.
Standard payment terms are 14–30 days from invoice. Some agencies use “pay-when-paid” clauses, meaning they only pay you when the end client pays them. This transfers the client’s credit risk to you. Where possible, negotiate for payment on a fixed timeline regardless of when the client pays the agency.
Most agency contracts specify 1–4 weeks’ notice on either side. A shorter notice period gives you more flexibility but less income security. If the client wants to extend beyond the initial term, the agency typically issues a contract extension — review the terms each time, as IR35 conditions may change.
Your contract should include a substitution clause, a clause confirming you control the method of work, and clear project-based deliverables. Many agencies use template contracts that are weak on these points. Have your IT contractor accountant review the contract before you sign — particularly the clauses relevant to the three IR35 tests.
Some agencies offer to process expenses on your behalf — you submit receipts to the agency and they reimburse you before deducting tax. This is common in umbrella and inside-IR35 arrangements. For outside-IR35 Ltd company contractors, it is almost always better to claim expenses through your own company: you retain full control, the expense reduces your corporation tax bill, and you are not dependent on the agency’s expense approval process.
If you work at the same client site through the same or different agencies for more than 24 months (or expect to), that site becomes a permanent workplace and travel expenses are no longer deductible. This rule catches contractors who renew agency contracts at the same client year after year. At every renewal, check whether the 24-month threshold is approaching and discuss with your accountant.
| Factor | Through an Agency | Direct with Client |
|---|---|---|
| Finding work | Agency handles sourcing, interviews, negotiations | You market yourself, network and pitch directly |
| Rate | Lower (agency takes 5–20% margin) | Higher (no middleman) |
| Payment admin | Agency handles client invoicing | You invoice the client directly |
| IR35 determination | Client determines, agency is fee-payer | Client determines (medium/large) or you determine (small) |
| Contract negotiation | Agency negotiates with client on your behalf | You negotiate directly — more control over terms |
| Rate visibility | Client rate hidden by agency margin | Full transparency — you know the client’s budget |
| Ongoing pipeline | Agency may offer future roles proactively | You must maintain your own pipeline |
| Ideal for | New contractors, competitive markets, roles requiring clearance | Established contractors with strong networks, niche specialists |
Many experienced contractors use a hybrid approach: agency placements for the bulk of their work (leveraging the agency’s client relationships) while building direct client relationships for the long term. Once you have a proven track record, direct contracts eliminate the margin and give you full control over IR35 positioning.
There is nothing preventing you from registering with multiple agencies or holding multiple concurrent contracts. In fact, working for more than one client strengthens your outside-IR35 position — it demonstrates you are genuinely in business on your own account rather than economically dependent on a single client.
ICAEW-regulated and led by Godwin Pinto ACA, AccTek provides specialist support for contractors working through agencies:
Whether you are an IT contractor on your first agency placement or a freelancer juggling multiple agencies, we ensure every contract is optimised.
Does the agency decide my IR35 status?
No. The end client determines your IR35 status (for medium/large clients). The agency’s role is to pass the Status Determination Statement to you and act as the fee-payer if the determination is inside IR35. For small end clients, you determine your own status. See our IR35 guide.
Can I use my limited company through an agency?
Yes. If the contract is outside IR35, the agency pays your limited company gross. If inside, the agency deducts PAYE before paying your company the net amount. Your company still exists in both scenarios. Some agencies require you to provide a UTR, certificate of incorporation and proof of professional indemnity insurance.
How do I negotiate a higher rate through an agency?
Research the market rate for your skill set (job boards, contractor forums, industry surveys). Present your rate as the minimum you will accept and let the agency negotiate with the client above that. If the agency pushes for a lower rate, ask what margin they are taking — some agencies are flexible on their cut, especially for long-term placements. For inside-IR35 roles, negotiate a 15–18% rate uplift to compensate for the additional tax.
Can the agency change my payment terms mid-contract?
Not without your agreement. Payment terms are part of your contract. If the agency attempts to extend payment terms unilaterally (e.g. from 14 days to 30 days), this is a contract variation that requires your consent. Review any “variation clause” in your original contract — some allow the agency to make changes with written notice, so read it carefully before signing.
What if the agency goes bust and owes me money?
You become an unsecured creditor. In practice, recovering money from an insolvent agency is difficult. Mitigate this risk by choosing established agencies, checking their financial health (Companies House accounts), and keeping payment terms short (14 days). If you are owed money when an agency enters administration, register your claim with the appointed insolvency practitioner immediately.
Should I go direct with the client after my agency contract ends?
Check your restrictive covenant first — most agency contracts include a 6–12 month restriction on working directly with the client. Breaching it can result in the agency claiming an introduction fee (often 15–20% of your annual billing) from the client, who may then pursue you. Wait for the restriction to expire, then approach the client directly if they are open to it. The rate uplift from cutting out the agency margin can be significant.
Do I need an accountant if I work through an agency?
If you operate through a limited company, yes — you need annual accounts, a corporation tax return, payroll, and optimised salary and dividend planning. If you work through an umbrella, the umbrella handles tax but you still benefit from a Self Assessment review and pension planning advice. A specialist contractor accountant ensures you are on the right structure and claiming everything you are entitled to.
We check your IR35 position, flag problematic clauses and model your take-home under every payment option. Included in your monthly fee.
