The government just wrapped up its consultation on tackling tax and employment rights issues linked to umbrella companies. This means we’re closer to having regulations in place for this sector.
So, what’s the plan? The government hit on a two-part strategy to make sure IT contractors and others get their employment rights and are taxed correctly when using umbrella companies. First, they’ll clarify what umbrella companies are by amending the Employment Rights Bill. This will place their operations under the scrutiny of the Employment Agency Standards Inspectorate (EASI). Many in the contracting community have been calling for this for years since EASI is responsible for protecting the rights of agency workers.
Typically, employment agencies use umbrella companies to handle payroll for the workers they represent, so getting EASI involved makes sense. The second part of the plan shifts responsibility for Pay As You Earn (PAYE) contributions onto employment agencies when umbrella companies are part of the supply chain. This was mentioned in the Autumn Budget 2024, where the government estimated this change could bring in an extra £895 million in taxes by the 2026/2027 financial year by making tax avoidance harder for these companies.
Starting in April 2026, if an umbrella company is used, the recruitment agency that supplies the worker will be responsible for making sure the correct PAYE is paid. If there’s no agency involved, then the end client takes on that responsibility.
While the move toward defining and regulating umbrella companies is underway, the consultation revealed that stakeholders don’t fully agree on how best to define these companies. However, there was some consensus on what regulations should focus on, like addressing financial issues and making sure workers understand their umbrella arrangements.
Tax avoidance in the umbrella market is rampant, with HMRC reporting a loss of £500 million due to disguised remuneration schemes in the last tax year—most of which involved umbrella companies. This compliance gap not only puts workers at risk of big tax bills but also lets non-compliant companies undercut the honest ones, threatening the market’s integrity.
Crawford Temple, CEO of Professional Passport, noted that the government’s announcements reflect prior expectations. He pointed out that the true impact of these changes will only be clear once the draft legislation is out, giving agencies a clearer view of their compliance responsibilities.
Temple also cautioned that the government must tread carefully in defining umbrella companies. A loose definition could create new loopholes for exploitation. He emphasized the need for robust implementation to avoid further non-compliance.
Since the government first committed to regulating the umbrella sector back in 2018, progress is encouraging. However, Temple insists that regulation alone isn’t enough. HMRC must enhance compliance and enforcement, which has been lacking in recent years.
On a positive note, Dave Chaplin, CEO of ContractorCalculator, voiced that regulation is long overdue and that this shift in responsibility for PAYE is a game-changer. He believes it will help protect workers from rogue umbrella companies and their non-compliant practices, setting the stage for a more just labor market. The battle against tax fraud and unfair deductions is ongoing, but these reforms are a step toward fairness.