The government estimates that umbrella companies were used to engage at least 700,000 temporary workers in the UK in 2022/23. Adelle Greenwood explains why and looks ahead to changes planned to take effect from April 2026.
An umbrella company is an intermediary that typically employs workers on behalf of an employment business (agency). The temporary workers are then supplied to end clients. The workers are employees of, and have an employment contract with, the umbrella company; however, they do not provide any services to the umbrella company itself. Use of umbrella companies is common across many industries, with interest increasing significantly following the off-payroll working changes in the private sector (from April 2021).
The umbrella company is legally responsible for invoicing the agency or client, operating payroll and taking deductions (eg, for pay as you earn (PAYE) and national insurance contributions (NIC)) and paying the worker. The workers are considered to be employees and must be afforded the same employment rights as other employees. Where operated compliantly, the umbrella company model provides a useful employment solution for workers, agencies and clients – enabling flexible temporary work while managing the administration, compliance and tax obligations. However, the structure has also often been abused and used for tax avoidance purposes.
HMRC estimates that £500m was lost to disguised remuneration tax avoidance schemes in the tax year 2022/23
A consultation on options for tackling non-compliance in the umbrella company market was held by the previous government during the period June to August 2023. You can read ICAEW’s response to the consultation here. The government recently published the outcome of the consultation and confirmed that it will legislate, through an amendment to the Employment Rights Bill, to both define and allow for the regulation of umbrella companies.
Tax avoidance and non-compliance
HMRC estimates that £500m was lost to disguised remuneration tax avoidance schemes in the tax year 2022/23 and that almost all of this was facilitated by non-compliant umbrella companies.
Umbrella companies have been used to enable tax avoidance schemes and to exploit temporary workers in various different ways, including the following:
- Loan arrangements/disguised remuneration
Historically the umbrella company may have paid some or all of the remuneration as a ‘loan’, ‘salary advance’, ‘grant’ or ‘annuity’ or other form of credit that is unlikely to be repaid. No PAYE or NIC is withheld and the payment is treated as ‘non-taxable’. This is remuneration that should have been subject to PAYE and NIC and would likely have become subject to the loan charge. - Underpaying workers
The umbrella company pays the worker less than the agreed rate while issuing the recruitment agency with an invoice for the full amount. Temporary workers, who are trusting these companies to work out their PAYE and NI, often do not realise that they are being underpaid. - Overpaying workers
The umbrella company pays the worker more than is reported on the payslips. There is no PAYE or NIC withheld on the additional remuneration, representing an employer’s NIC saving for the umbrella company and leading the worker to think they are compliant and getting a better deal by using this structure. - Retaining withholdings
The umbrella company withholds PAYE and NIC but does not pay the funds to HMRC, leaving the worker believing they are being fully compliant while the umbrella company retains the funds. - Misappropriating holiday pay
The umbrella company will correctly retain some wages for holiday pay but will keep the funds if the holiday is not taken or the employee leaves employment with the umbrella company. As this is a complex area, the worker may not be aware that they are entitled to these retained funds.
Workers are advised to take steps to ensure umbrella companies are paying them fairly, only deducting agreed fees, and to be wary of those promoting a lower overall tax cost.
Mini umbrella company fraud
Umbrella companies have also been used to deprive HMRC of revenue by the abuse of the employment allowance and the VAT flat rate scheme (FRS). Mini umbrella company (MUC) fraud typically involves the creation of multiple small limited companies by an ‘outsourcing’ or ‘promoter’ business. Only a handful of temporary workers are employed by each company and the employer may change regularly. It is claimed that each MUC is independent, with a separate director and in business for its own benefit, whereas in reality they are associated and jointly controlled. Each MUC then claims the employment allowance, fraudulently reducing the employer’s NIC due.
This type of fraud originated in 2016, following the changes to temporary workers’ eligibility to claim travel and subsistence, where agencies were looking for alternative tax benefits. The MUC appears to be an ordinary umbrella company to the workers and to others in the supply chain, but complex layers help enable the fraud. Nominee directors, who are often non-UK-resident, head up these companies and disguise the real ownership, making it harder for HMRC to detect the fraud and take action. Often such directors are not aware of the tax avoidance schemes they are involved in.
The creation of multiple MUCs also allows abuse of the VAT FRS. This is achieved by limiting the number of employees and turnover of each company to the level where maximum advantage can be taken of the financial allowances available.
If HMRC finds that a business in the supply chain knew or should reasonably have known there was fraud, the business could lose their right to deduct VAT input tax. HMRC can also transfer liability for any associated penalties to the company officer.
Some red flags for MUC fraud within the supply chain include:
- unusual or unfamiliar company names on payslips;
- recent creation of the company;
- unrelated business activity description at Companies House;
- frequent movement of workers between companies; and
- non-resident directors.
Recent cases involving umbrella companies and MUC fraud include The Commissioners for HMRC v Ducas LTD & Others [2024] EWHC 3132 (Ch) and Elphysic Limited & Others v HMRC [2024] UKFTT TC 09126.
In its recent response to the consultation, the government said that it will not be taking forward targeted measures to address this fraud apart from ongoing monitoring.
HMRC guidance and tools
HMRC has published comprehensive guidance on working with umbrella companies for both workers and businesses.
For businesses, the message is clear that they are responsible for auditing their supply chain to ensure compliance and can be held liable if they should have been aware of any fraud. There is also guidance on obligations to workers, including what information they must be provided with (eg, key information document) and an awareness of MUC fraud. The recent consultation also explored the option of mandating due diligence for businesses that use umbrella companies and implementing an associated penalty regime. However, the government concluded that such an obligation alone would not be sufficient to achieve the behavioural changes desired.
For workers, there is guidance on pay and rights, how to identify tax avoidance and what to do if a worker thinks they may be impacted.
HMRC launched a new tool to check pay from umbrella companies in December 2024, aimed at employees of umbrella companies or agencies using such companies. It allows the user to enter information to calculate the pay they should be receiving or paying based on their assignment rate. It works best for those engaged on one contract at a time, aged 21 or over and liable to NIC at category A rates and for the current tax year only.
Where there is a differential in the pay being paid or received, the tool does suggest this may be due to factors such as rate of pension contributions, etc, but also that there may be tax avoidance involved.
Changes due from 6 April 2026
The recent consultation also considered the transfer of tax debt to another business within the supply chain and deeming the employment business to be the employer, moving the responsibility to operate PAYE.
As announced at the Autumn Budget in October 2024, as of 6 April 2026 the responsibility for accounting for PAYE and NIC will be moved from the umbrella company to the recruitment agency. If there is no recruitment agency involved in the supply chain, then the end client will become responsible. If multiple agencies are involved, then the “agency that has a contractual relationship with the end client” will take on the liability for these withholdings. The purpose of this change is to encourage more due diligence in labour supply chains and agencies to be more selective in the umbrella companies they contract with – in many ways bringing the tax position for umbrella company workers in line with other agency workers.
Further details on how these proposals will operate in practice are expected to be released in the coming months, as well as the draft legislation in the 2025-26 Finance Bill. The government expects this change to raise £500m in 2029-30.
As of 6 April 2026 the responsibility for accounting for PAYE and NIC will be moved from the umbrella company to the recruitment agency
Going forward, agencies that choose to operate payroll themselves will need to withhold PAYE and NIC and remit these to HMRC before making payments to the umbrella companies. The umbrella companies may still be used to pay the workers the net amounts due.
Some agencies may choose to continue to outsource payroll to umbrella companies. However, in this case, the agency (or end client) will be liable for any shortfall in the PAYE and NIC withheld and remitted or any related non-compliance.
The case for umbrella companies
There is understandably some concern that this change will have a considerable detrimental effect on the umbrella company market. For temporary workers, there are advantages of being employed via an umbrella company – especially for multiple contracts. These include providing consistent employment history for both mortgage applications and credit history as well as helping workers to build up employment rights (eg, holiday pay). For agencies and clients, umbrella companies provide a useful service for outsourcing the administration of small businesses.
The proposed changes will render umbrella companies less useful to agencies and end clients. The government has confirmed in its consultation response that it will define and regulate umbrella companies to bring them in scope of the Employment Agency Standards Inspectorate’s and Fair Work Agency’s remit.
The consultation response highlights the complexity of successfully defining umbrella companies and proposes a simpler approach in focusing on two key elements that are indicative of an umbrella company:
- first, that an entity is in the business of employing a person with a view to them being supplied to a hirer; and
- second, that an entity is in the business of paying for, receiving or forwarding payment for the services of persons with a view to them being supplied to a hirer.
ICAEW agrees that there is a need to redefine the umbrella company more tightly to ensure other contracting models, including small personal service companies with a few employees, do not fall within the definition unintentionally.
Ideally, there needs to be a solution that preserves the functionality of the umbrella company while simultaneously closing down the opportunities for tax avoidance and non-compliance that the current situation allows. This may include preserving the ability of compliant umbrella companies to receive gross payments from agencies and process payrolls efficiently, ensuring continuity of employment benefits and the correct remittance of tax liabilities, while leaving agencies free to concentrate on identifying and hiring such labour as required by its clients.
Adelle Greenwood, Technical Manager, Employment Taxes and NIC, ICAEW
