The Government announced plans for a crackdown on non-compliant umbrella companies in the Autumn 2024 budget. Under the plans, it was proposed that where umbrella companies are used in a labour supply chain, end clients and agencies would be responsible for payroll tax compliance. In a welcome move, it is now proposed that, rather than being solely responsible for payroll taxes, end clients and agencies will be jointly and severally responsible along with the umbrella.
Under draft legislation published on 21 July 2025, the end client and umbrella company will be jointly and severally responsible for operating PAYE/NICs on the earnings of a worker engaged by an umbrella company unless there is a UK agency in the labour supply chain. If there is a UK agency in the chain, the UK agency and umbrella company will be jointly and severally responsible. If there is more than one UK agency the chain, it is the agency which has the direct contractual relationship with the end client that will be jointly and severally responsible.
What is an umbrella company?
The draft legislation defines an umbrella company as a person who carries on the business of supplying labour (whether or not with a view to profit and whether or not in conjunction with any other business) to an end client and in which the worker who is supplied to the end client does not have a material interest. Typically, the workers supplied by the umbrella are engaged as employees. The umbrella company generally manages all the administration (such as time sheets and billing) relating to the assignment and is obliged to operate PAYE and NICs on the workers' earnings.
Who uses umbrella companies?
Many businesses use UK umbrella companies in their labour supply chains, particularly since the introduction of IR35 to the private sector in April 2021. Businesses often require those contractors who are inside IR35 (i.e. contractors who are supplying their services via their own intermediary (such as a personal services company) and who would be an employee of the end client if hired directly by the end client) to provide their services as an employee of an umbrella company instead.
What's the issue?
While many umbrella companies comply in full with their PAYE/NICs obligations, some do not. Instead, non-compliant umbrella companies use various avoidance schemes to try to reduce their tax burden.
What's the solution?
To ensure PAYE/NICs compliance, the draft legislation makes it clear that the umbrella company and the end client (or UK agency) have joint and several liability for operating PAYE/NICs. This will apply to payments made to umbrella company workers on or after 6 April 2026.
What does this mean?
The initial proposal of making the end client (or UK agency) solely responsible for operating PAYE/NICs raised concerns that many businesses would stop using umbrella companies and bring the payroll in-house. This would have had potentially devastating consequences for the umbrella company sector and smaller employment businesses which may not have an in house payroll capability.
This change means that businesses can continue to use umbrella companies. However, it does not mean that end clients (or UK agencies) are off the hook. HMRC will still seek arrears, interest and penalties from the end client (or UK agency) if the umbrella company fails to fully comply with its PAYE/NICs obligations. It is essential therefore that businesses:
- carry out appropriate due diligence on their selected umbrella companies;
- conduct regular audits of the umbrella companies' compliance with PAYE /NICs obligation; and
- ensure that their contracts with umbrella companies contain appropriate indemnities/warranties.
What about the regulation of umbrella companies?
As we explained in our article earlier this year, the response to the 2023 consultation (published in March this year) indicated the Employment Rights Bill would be amended to define umbrella companies and enable their regulation under the Conduct Regulations. This is now addressed in s. 40 of the Bill. This amendment will bring umbrella companies within the remit of the Employment Agency Standards Inspectorate (and subsequently the Fair Work Agency, once established).
However, in terms of the substance of the regulation, changes to the Conduct Regulations require consultation. While the details of the amendments remain to be seen, the recent Roadmap outlining the timescale for implementing the Bill does provide some clarity on timing, indicating that this consultation will take place in the Autumn 2025.
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