Policy paper

Umbrella companies — tackling non-compliance in the umbrella company market

Published 21 July 2025

Who is likely to be affected

Recruitment agencies that use umbrella companies to engage the workers they supply.

End client organisations that use workers who are engaged by umbrella companies where there is no agency in the labour supply chain.

Umbrella companies that process pay for workers on behalf of agencies and end clients.

General description of the measure

Umbrella companies are employment intermediaries that employ workers on behalf of agencies and end clients. This measure will make recruitment agencies responsible for accounting for Pay As You Earn (PAYE) and Class 1 National Insurance (NIC) on payments made to workers that are supplied via umbrella companies. Where there is no agency, this responsibility will fall to the end client business.

Policy objective

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

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 will improve compliance in the market.

This policy has three main objectives: 

• to close the tax gap by protecting taxpayers and the Exchequer from significant losses caused by the fraudulent activities of some umbrella companies — this will also reduce the large sums of money going to organised criminal gangs involved in labour supply chain fraud
• to prevent workers facing large, unexpected bills for Income Tax and NIC that have not been paid to HMRC by non-compliant umbrella companies
• to ensure that the temporary labour market operates on a level playing field by preventing fraudulent operators under-cutting the compliant businesses that operate within the rules

This change will also support the government’s mission to grow the economy and create good jobs across the country. In conjunction with the government’s plan to make work pay, these changes will tackle the low standards by some in the labour supply chain that have been holding back economic growth. 

Background to the measure

Many umbrella companies operate diligently, supporting their employees and providing convenience and administrative benefits for agencies. However, 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 works to warn people 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 two 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.

At Autumn Budget 2024 the government announced that it would bring forward legislation to change who has responsibility to account for PAYE where a non-compliant umbrella company is used in a labour supply chain to engage a worker. 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.

The government published a policy paper at Autumn Budget Tackling non-compliance in the umbrella company market

The government published it’s response to the consultation on 4 March 2025 alongside the original consultation paper in the Consultation outcome — tackling non-compliance in the umbrella company market.

Detailed proposal

Operative date

This measure will have effect from 6 April 2026. 

Current law

Current law relating to the taxation of employment income is included in the Income Tax (Earnings and Pensions) Act (ITEPA) 2003 and the Income Tax (Pay As You Earn) Regulations 2003. Specific legislation relating to the tax treatment of employment income provided to workers engaged via employment intermediaries is in chapters 7 to 10, part 2 of ITEPA.

Current law for National Insurance contributions is in the Social Security Contributions and Benefits Act 1992, the Social Security Contributions and Benefits (Northern Ireland) Act 1992, the Social Security Contributions (Intermediaries) Regulations 2000 and the Social Security Contributions (Managed Service Companies) Regulations 2007.

Proposed revisions

Legislation will be introduced in Finance Bill 2025-26 to amend part 2 of ITEPA 2003. The legislation will introduce a new chapter 11 into part 2 to make employment agencies or end clients joint and severally liable for any amount required to be accounted for under the PAYE provisions where an umbrella company forms part of a labour supply chain.

Further legislation will be introduced to amend section 4A of Social Security Contributions and Benefits Act1992 to provide HM Treasury with the power to make regulations imposing an equivalent joint and several liability for NIC purposes.

Joint and several liability will allow HMRC to pursue an agency in the first instance for any payroll taxes that a non-compliant umbrella company fails to remit to HMRC on their behalf. The end client will be liable if contracting directly with an umbrella company.

Summary of impacts

Exchequer impact (£ million)

2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029	2029 to 2030
+ 0	+ 75	+ 895	+ 740	+ 635	+ 500

These figures are set out in table 5.1 of Autumn Budget 2024 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Budget 2024.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

This measure may impact the approximately 700,000 individuals who work through umbrella companies. The government anticipates that the measure will reduce non-compliance in the umbrella company market by preventing non-compliant umbrella companies from being given access to the market by recruitment agencies and end-client businesses. This will reduce the harm caused to workers by not having the correct tax deducted from their pay and remitted to HMRC. It may also, indirectly, reduce the harm caused by other types of non-compliance, such as a failure to properly provide statutory payments or employment rights.

It is anticipated that some agencies or end-client businesses may decide to operate their own payroll, rather than contract with an umbrella company. In this case, individuals may see a change in the party paying them.

If an agency decides to move a worker onto its own payroll rather than using an umbrella company, the worker may also see their employment status change to that of an agency ‘limb (b) worker’. They will have specific protections through the Employment Agencies Act 1973 and the associated Conduct of Employment Agencies and Employment Businesses Regulations 2003. Agency workers are also protected through the Agency Workers Regulations 2010.

For more information on worker’s rights, read: Your rights as an agency worker.

The measure is not anticipated to significantly impact individuals’ customer experience. However, some individuals may see an improved customer experience because a reduction in non-compliant umbrella companies will lead to fewer individuals facing enquiries. 

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

It is anticipated that this measure will reduce the harm caused to workers from non-compliance activities of some umbrella companies. Where a protected group is over-represented there will be a disproportionate impact.

Males are estimated to make up around twice as many employees of umbrella companies as females. Employees of umbrella companies tend to be of working age, with few individuals aged over 65. For umbrella companies in general it is estimated that around 70% of employees are aged between 25 to 54, whereas this age range represents around 50% of the UK adult population. Among the payrolls of mini-umbrella companies deemed highest risk, which are fraudulent and therefore more likely to be impacted by this measure, employees aged 18 to 34 are particularly overrepresented at around 50% of the population, compared to representing around 25% of the UK adult population.

HMRC does not currently hold data on the other protected characteristics of individuals impacted by this measure and so cannot determine conclusively if there are any equality impacts.

Impact on business including civil society organisations

This measure is likely to increase customer costs for some of the businesses affected. HMRC is working to understand these costs and the scope of any impacts better and will update at a future fiscal event. The government is committed to keeping additional business burdens to a minimum in respect of this change.

The introduction of joint and several liability for PAYE taxes that umbrella companies are required to remit to HMRC, will have an impact on all umbrella companies and those employment agencies that use umbrella companies to engage the workers they supply. 

This measure is intended to encourage increased due diligence among businesses that choose to use umbrella companies to engage workers, although many employment agencies already undertake significant due diligence on their suppliers. For those businesses that choose to undertake greater due diligence, one-off costs could include familiarisation with the new legislation and training or upskilling staff to undertake due diligence checks. Continuing costs could include introducing regular due diligence checks. HMRC already has guidance in place to support businesses with labour supply chain due diligence. 

Some businesses will choose to administer their own payrolls rather than contracting with an umbrella company. Whilst in most cases it is anticipated that the businesses will already be operating PAYE for existing employees or agency workers, one-off costs in this case could include familiarisation with PAYE obligations and training or upskilling staff to undertake the payrolling obligations. Continuing costs would include those associated with processing payroll and operating PAYE, including staffing and payroll software costs.

The measure is not expected to significantly affect businesses’ experience of dealing with HMRC because it does not change the operation of Income Tax, NIC or PAYE other than introducing a liability for some agencies and end-client businesses. 

The measure is not expected to impact civil society organisations. 

Operational impact (£ million) (HMRC or other)

HMRC will need to make changes to non-customer-facing IT systems to deliver this change which are currently estimated to cost in the region of £3.8 million.

The estimated resourcing impact is in the region of £260,000.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

Consideration will be given to evaluating aspects of the policy, including the impact on agencies and workers.

Further advice

If you have any questions about this change, please email umbrellacompanyevidence@hmtreasury.gov.uk.