The UK Government is planning to regulate umbrella companies for the first time. These changes could have a significant impact on employers, agencies, and workers involved in labour supply chains.
What is an umbrella company?
An umbrella company employs temporary workers on behalf of recruitment agencies or end clients. While the worker performs services for the agency or client, the umbrella company handles their pay, tax, and employment rights. It invoices the client for the worker’s time and deducts income tax and National Insurance through PAYE, charging a fee for this service.
Importantly, umbrella companies do not find work for the worker. The worker typically secures assignments through an agency or directly with a client.
Why do employers use umbrella companies?
Umbrella companies offer a convenient way to manage temporary workers, especially in complex supply chains. They simplify payroll and tax compliance and provide workers with employment rights such as holiday pay and pension contributions. For employers and agencies, this can reduce administrative burden and legal risk - provided the umbrella company operates compliantly. However, some have been linked to tax avoidance schemes and failure to uphold workers’ rights.
What is changing?
The Government is proposing two key reforms:
1. Statutory regulation
Umbrella companies will be legally defined and regulated as part of the Employment Rights Bill. This change aims to improve transparency and accountability in the sector.
A public consultation is expected to get underway soon, with legislation likely to come into force in 2027.
2. New PAYE rules
From 6 April 2026, umbrella companies and the agencies or end clients that use them will be jointly and severally liable for PAYE tax on payments made to workers. This means that if the umbrella company fails to pay the correct tax, HMRC can recover the unpaid amount from the agency or client. The goal is to encourage greater due diligence and compliance across labour supply chains.
Why does this matter?
These reforms will place new responsibilities on agencies and end clients. Businesses will need to carefully vet the umbrella companies they work with and ensure they meet legal and tax obligations. Failure to do so could result in financial penalties and reputational damage.
Employers should prepare by reviewing existing arrangements. We recommend:
- Auditing your labour supply chains
- Reviewing contracts with umbrella companies
- Monitoring developments in the upcoming consultation.
For more information, contact our Employment Team.
