Future Changes Impacting the Use of Umbrella Companies

Umbrella companies have long been a cornerstone of the UK’s labour market, providing a bridge between contractors and businesses, particularly in the wake of IR35 reforms. They offer a convenient solution for engaging contingent workers while handling administrative tasks such as tax deductions, National Insurance contributions, and payroll processing. However, the industry has faced ongoing scrutiny due to regulatory loopholes, non-compliance, and tax avoidance schemes.

The UK government has now taken decisive steps to tighten regulations surrounding umbrella companies. In the Autumn Budget 2024, it was announced that, from April 2026, responsibility for PAYE and NIC compliance will shift up the labour supply chain, impacting end clients and recruitment agencies that use umbrella companies. These changes will reshape the labour supply landscape, increasing compliance burdens for businesses. This article explores the role of umbrella companies, the key changes ahead, and the steps businesses should take to prepare.

The Role of Umbrella Companies

Umbrella companies act as intermediaries between contractors and end clients. They employ temporary workers, and handle payroll under PAYE (Pay As You Earn), ensuring tax and National Insurance deductions are made correctly. They provide a flexible alternative to traditional employment, particularly for industries reliant on contract workers.

Following IR35 reforms in 2017 (public sector) and 2021 (private sector), many organisations opted to engage contractors through umbrella companies rather than limited companies to mitigate tax risks. This shift has resulted in a booming umbrella company sector, with an estimated 700,000 workers now using such arrangements.

Challenges in the Umbrella Market

While umbrella companies (payment providers) provide a vital function, non-compliance and malpractice remain persistent issues. Problems range from non-transparent pay structures to deliberate tax fraud. The government’s focus is now on addressing these risks through greater accountability within supply chains.

Key Changes from April 2026

The proposed legislative reform will remove PAYE and NIC non-compliance liability from umbrella companies. Instead, responsibility will shift up the supply chain to either:

• The end client (if they engage the umbrella company directly), or
• The closest recruitment agency in the supply chain.

The forthcoming Finance Bill 2025-26 will provide further details on how this will be implemented.

Why is the Government Moving Liability Up the Supply Chain?

The umbrella company market has varying levels of compliance, leading to worker exploitation, tax evasion, and payroll fraud. The government’s approach mirrors other recent compliance shifts, aiming to ensure businesses conducting legitimate operations do not inadvertently enable non-compliance.

Examples of Non-Compliance

1. Non-transparent pay practices – Workers often receive misleading information regarding their earnings. The Appiah v Tripod Partners Ltd/Home Office tribunal case highlighted issues around unclear contractual agreements, particularly regarding Employer NIC deductions.
2. Fraudulent or misleading documentation – Some umbrella companies manipulate Real-Time Information (RTI) payroll submissions, as evidenced in Revenue and Customs Commissioners v PPS Umbrella Co Ltd (2024).
3. Failure to provide statutory employment rights – The government’s 2023 Call for Evidence revealed that many umbrella workers were denied holiday pay and pension contributions, often due to incorrect calculations.
4. Mismanagement of tax deductions – Poor understanding of client expense policies leads to incorrect taxation, leaving workers out of pocket.
5. Tax avoidance schemes – Some umbrella companies structure payments as non-taxable earnings via loans or annuities to reduce tax liabilities, a clear breach of HMRC regulations.
6. Mini Umbrella Company (MUC) fraud – Fraudsters establish multiple small umbrella firms to exploit NIC and VAT allowances, obscuring ownership structures to evade taxes.

Due Diligence and Compliance Responsibilities

With liability shifting to end clients and recruitment agencies, businesses must enhance due diligence when engaging umbrella companies. The government’s labour supply chain guidance (GfC12 - Tax Risks) outlines best practices to mitigate risk.

Key Due Diligence Actions:

• Assess your supply chain – Identify all entities involved in engaging and paying workers.
• Verify compliance – Conduct regular, reasonable checks on umbrella companies.
• Understand pay structures – Ensure transparency in how contractors are paid.
• Document processes – Maintain records of compliance checks to protect against future liability.

Next Steps for Businesses

With significant changes approaching in April 2026, businesses should take proactive steps:

1. Engage with recruitment agencies and managed service providers – Understand their strategy for compliance.
2. Monitor draft legislation in Finance Bill 2025-26 – Stay updated on legal developments.
3. Review labour supply chain contracts – Ensure agreements reflect the new risk structure.
4. Implement robust compliance processes – Regularly audit and document due diligence efforts.

Conclusion

The proposed reforms mark a pivotal shift in the umbrella company landscape, placing greater responsibility on end clients and recruitment agencies. While these changes will enhance compliance and reduce tax fraud, they will also increase administrative burdens. Businesses must act now to review supply chains, improve due diligence, and stay ahead of legislative updates to ensure a smooth transition in 2026.

Redline changes lives every day, building world-class teams for technology and engineering companies. With four decades of experience, our knowledge-led people tailor recruitment solutions to suit clients' specific needs. Get in touch today at info@RedlineGroup.com or call 01582 450052 if you need advice or support around contracts and temporary employment or visit contractor resources.