Policy paper

Tackling non-compliance in the umbrella company market

Published 30 October 2024

1. Introduction

The UK’s labour market is not delivering for workers or businesses and is contributing to the UK’s economic underperformance. Key to addressing this is improving standards within the temporary labour market.

HMRC analysis shows that umbrella companies were used to engage at least 700,000 workers in 2022 to 2023. This analysis also shows that at least 275,000 of these workers, and likely significantly more, were engaged at some point in 2022 to 2023 by umbrella companies that failed to comply with their tax obligations. HMRC data shows that £500 million was lost to disguised remuneration tax avoidance schemes in 2022 to 2023, almost all of which was facilitated by umbrella companies. These schemes can leave taxpayers with substantial tax bills. Hundreds of millions more was lost to so called ‘mini umbrella company’ fraud and other fraudulent attacks by people abusing umbrella company structures.

The government is committed to closing the tax gap and making the tax system fairer by ensuring temporary workers are protected from large, unexpected tax bills caused by unscrupulous behaviour from non-compliant umbrella companies.

As announced at Budget on 30 October 2024, the government will therefore bring forward legislation to change who has responsibility to account for Pay As You Earn (PAYE) where an umbrella company is used in a labour supply chain to engage a worker. This will move the responsibility to account for PAYE from the umbrella company that employs the worker to the recruitment agency that supplies the worker to the end client. Where there is no agency in a labour supply chain, this responsibility will sit with the end client. This will take effect from April 2026.

This note provides further details about the measure and the government’s next steps working towards its implementation.

2. Background to this measure

Umbrella companies are employment intermediaries that employ workers on behalf of agencies and end clients. Whilst many umbrella companies operate diligently, supporting their employees and providing convenience and administrative benefits for agencies, too many are used to facilitate non-compliance including tax avoidance and tax fraud. This incurs significant losses for taxpayers and can leave workers with unexpected tax bills. In addition to causing significant harm to workers and taxpayers, non-compliant umbrella companies undercut compliant firms, threatening the viability of those businesses that do the right thing, as well as the functioning of the market itself.

HMRC undertakes communications activity to warn workers of the dangers of getting caught up in tax avoidance schemes operated by rogue umbrella companies and to help them to spot the warning signs. HMRC uses real-time data to quickly identify people who might have entered tax avoidance schemes, writing to those identified within 2 months to help them to exit the scheme before they build up large tax bills. HMRC also investigates and pursues non-compliant umbrella companies using its enforcement powers. However, the ease with which new umbrella companies can be created means that the individuals behind these non-compliant structures can quickly establish new ones and attempt to relaunch them into the umbrella company market.

The government recognises the efforts of the membership and accreditation bodies to drive up standards in the recruitment sector. However, the evidence shows that non-compliant models continue to operate, causing harm to workers and funnelling taxpayers’ money to organised crime groups. This position is neither sustainable for taxpayers, nor fair to the businesses trying to compete honestly, or the workers just looking to get paid correctly.

In 2023, the previous government consulted on options to reduce non-compliance in the umbrella company market. Each of these options was intended to encourage the businesses that choose to use umbrella companies within their labour supply chains to undertake greater assurance activity in their labour supply chains to ensure the legitimacy of their suppliers.

Recruitment agencies can decide which businesses enter their labour supply chains, and they have the power to prevent illegitimate operators from entering the market. The government believes that making those who can control labour supply chains legally responsible for ensuring that PAYE is properly accounted for is the most effective way of improving compliance in the market.

It is the government’s assessment that this option will most improve outcomes for workers, support a level playing field for compliant businesses, and protect taxpayers from the significant losses to the Exchequer. This measure is expected to protect around £2.8 billion from being lost to umbrella company non-compliance across the scorecard period to 2029 to 2030. This change will support the government’s mission to grow the economy and create good jobs in every part of the country. Alongside the government’s Plan to Make Work Pay, these changes will tackle the low standards that have been holding our economy back.

The government and HMRC will work in partnership with businesses and the recruitment sector, including the compliant umbrella companies that want to clean up the market, to deliver this reform for the start of the 2026 to 2027 tax year.

3. What is being proposed?

The government will introduce legislation to make agencies that use umbrella companies to employ workers responsible for ensuring that the correct income tax and National Insurance contributions (NICs) are deducted and paid to HMRC. This will mean that the agency that supplies the worker to the end client will be legally responsible for operating PAYE on the worker’s pay and will be liable for any shortfall, whether they operated their payroll themselves or used the umbrella company to run payroll for them. If there is no agency involved in the supply of the umbrella company worker, this responsibility will be placed on the end client itself.

This measure will only change where tax obligations sit when using an umbrella company to pay a worker. The underlying tax and NICs liabilities will not change and PAYE will operate in the usual way. This will make the tax position for workers employed by umbrella companies the same as for other agency workers. Legislation has been in place since the 1970s to treat most agency workers as employees for tax purposes. Since 2014, where this legislation applies (Chapter 7, Part 2 of the Income Tax (Earnings and Pensions) Act 2003), responsibility for operating PAYE on payments to agency workers is placed on the agency that supplies the worker to the end client. This legislation does not apply if an umbrella company is used to employ a worker. One of the reasons that the umbrella company model has become more popular is because they are used to sidestep the obligations arising from this legislation. By making the same agency responsible for PAYE when an umbrella company is used, this measure will make PAYE obligations consistent for agency workers regardless of how they are engaged.

The government understands that some businesses, particularly smaller agencies, value the ability to outsource the administrative obligations of employment to umbrella companies. The government also recognises the positive role that compliant and well-managed umbrella companies and payment intermediaries can play in the functioning of the temporary labour market. This measure will not prevent businesses from continuing to use umbrella companies or other payment intermediaries to operate payroll on their behalf as they do now. This measure will ensure that while businesses can continue to do this, they will no longer be able to outsource the underlying PAYE obligation and will be ultimately responsible if the umbrella company operating payroll on their behalf fails to do so correctly.

The government anticipates that businesses that continue to outsource payroll operation to umbrella companies will take steps to ensure that these obligations will be correctly met on their behalf. This could include undertaking due diligence checks or putting in place legal indemnities.

4. Impact of the measure on businesses in labour supply chains

Impact on agencies

This measure will apply to agencies that supply workers directly to end clients. This means that where there are multiple agencies involved in the supply of a worker paid by an umbrella company, it will be the agency that has a contractual relationship with the end client that becomes responsible for accounting for PAYE.

Agencies operating PAYE will withhold income tax and NICs before making payments to the umbrella company employing the worker, or any other intermediary between them and the umbrella company, remitting these sums to HMRC and preventing umbrella companies from failing to pass sums that should be withheld from workers’ pay to HMRC. Agencies will also be responsible for the payment of employer NICs.

Where an agency chooses to outsource operation of payroll to the umbrella company that employs the worker they are supplying, PAYE will be operated by the umbrella company on behalf of the agency and the agency will be liable for any shortfall.

Impact on end clients

In the majority of cases, the government understands that workers employed by umbrella companies are supplied to end clients by an agency. However, if the end client is in a direct relationship with the umbrella company, then the end client will be responsible for accounting for PAYE. It will be for the end client to decide whether it will operate PAYE itself or will choose to outsource this to the umbrella company.

Impact on umbrella companies

Umbrella companies will no longer be legally responsible for operating PAYE on payments to the workers that they employ.

Impact on workers

Workers will continue to receive their pay net of income tax and NICs following the introduction of the measure, although the business providing their payslip may change. By reducing non-compliance in the umbrella company market, this measure will prevent workers from being engaged by non-compliant umbrella companies. This means that they will no longer be party to non-compliant tax arrangements that could otherwise have left them facing large, unexpected tax bills.

5. Next steps

This measure will take effect from April 2026. The government will set out full details of how this measure will operate in the coming months, alongside draft legislation ahead of its introduction to Parliament as part of Finance Bill 2025. The government will engage with stakeholders to ensure that they have the opportunity to provide feedback on the government’s detailed proposal. The publication of draft legislation will also be accompanied by a Tax Impact and Information Note.

The government is committed to supporting businesses to prepare for the implementation of this measure and to this end will publish technical guidance for businesses that will be affected by it.

In the meantime, the government will shortly publish an online tool to help workers and agencies understand pay from umbrella companies, as well as further guidance. This will also help businesses with the implementation of the measure.