Umbrella Company Reform

Why Is Reform Needed?

Compliant umbrella companies play a legitimate and valuable role in the labour supply chain, and HMRC has repeatedly acknowledged their importance. However, concerns remain about a minority of non-compliant operators that break the law, avoid tax, exploit workers, and damage trust in the wider sector.

In the 2022–2023 tax year alone, HMRC estimated it lost around £500 million to disguised remuneration schemes—often facilitated by non-compliant umbrella companies that pay workers through loans or artificial bonuses to avoid tax. With the umbrella sector engaging 700,000 workers in 2022-23, even limited non-compliance represents a serious cost to the public purse.

Stronger regulation and legislation aim to protect the integrity of the labour market, ensure the correct tax is paid, and improve outcomes for both workers and compliant businesses that use umbrella companies.

 

What’s Changing?

Regulation and Oversight

Amendments to the Employment Rights Bill, which is expected to be given Royal Ascent in Summer 2025, will legally define umbrella companies as employment businesses, bringing them under the regulatory oversight of the Employment Agency Standards (EAS) Inspectorate and the forthcoming Fair Work Agency.In addition, the government has committed to consulting on changes to the Conduct of Employment Agencies and Employment Businesses Regulations 2003 (“Conduct Regulations”) to introduce a bespoke regulatory framework for umbrella companies. The timeline and scope of this consultation are still to be confirmed.

Tax Liability Reform

From April 2026, recruitment agencies placing workers through umbrella companies will be liable for employment taxes of their workers if the umbrella supplier fails to comply with tax obligations. If multiple intermediaries exist in the supply chain, the agency closest to the hiring organisation will carry this liability. In supply chains without a recruitment agency, the liability will fall on the end hirer.

Joint and Several Liability Approach

On 12 June 2025, HMRC confirmed to an industry working group that its policy ‘direction of travel’ is toward a joint and several liability model. This approach allows multiple parties in a supply chain to be held liable for unpaid tax, but is expected to focus primarily on the party best placed to ensure compliance—in this case the recruitment agency. Legislative changes will be introduced via a new chapter in the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). Many in the industry view this as a pragmatic way to drive compliance while still allowing businesses to engage with reputable umbrella providers. Draft legislation is expected in mid-July on Legislation Day (L-Day), which should provide clarity on the exact obligations and liability mechanisms.

 

Has the Government Issued Any Guidance or Support?

On the specific of the changes- not quite yet given where we are in the timeframe
However, HMRC has in recent months published several pieces of guidance surrounding umbrella companies for various parties in the supply chains such as good practice guidelines for umbrella companies. This guidance covers eight key areas such as payroll accuracy, financial stability, and transparency with workers. The guidance is structured under broad principles, including that umbrella companies should be run by fit and proper people.

To support workers directly, the government has released a plain-language guide titled “Working through an Umbrella Company,” explaining how compliant supply chains should operate. It also offers a new online calculator to help workers estimate gross and net take-home pay from a single assignment.

It is expected that HMRC will continue engaging with the market and offering further education as the legislation progresses toward its April 2026 implementation date.

 

Timeline: How We Got Here

November 2021: Call for Evidence launched to understand umbrella company operations

June 2023: Government response published, and consultation opened on “Tackling Non-Compliance in the Umbrella Market”

October 2024: Autumn Statement announced plans to make recruitment agencies liable for PAYE where umbrella companies are used

March 2025: Government issued its formal response to the umbrella company consultation

June 2025: HMRC confirmed a joint and several liability approach

July 2025: Employment Rights Bill expected to receive Royal Assent; Draft tax legislation expected on L-Day

April 2026: Reforms take effect

What Should You Do Now?

While the full legislative detail is not expected until the draft legislation is published in July 2025, there are preparatory steps that different parts of the labour supply chain can begin to take now. The guidance below outlines early actions for recruitment agencies, end hirers, and contractors to consider in anticipation of the changes due in April 2026.

For Recruitment Agencies

Although specifics of the legislative framework are still forthcoming, recruitment agencies should consider:

• Mapping labour supply chains to understand where and how umbrella companies are used.
• Reviewing contracts, onboarding procedures, and referral mechanisms.
• Evaluating payroll models and planning for preferred supplier lists (PSLs).
• Beginning to define compliance criteria and internal due diligence frameworks.
• Opening lines of communication with umbrella partners and end hirers.

These actions will help prepare agencies to respond quickly once draft legislation clarifies their responsibilities under the joint and several liability model.

 

For End Hirers

End hirers should also begin assessing their current arrangements. Even though the final rules are pending:

• Identify where umbrella companies are used directly (i.e., not via an agency).
• Understand where liability may shift to you under the new rules.
• Work closely with recruitment partners to align expectations around compliance and PSL criteria.
• Review internal governance processes for contingent workforce engagements.

Remaining alert to changes will be key to mitigating risk as the final legislative framework becomes clear.

For Contractors

While contractors are not legally responsible for employment tax compliance under the new rules, they will still feel the effects. Pending the release of legislative details, contractors can:

• Use HMRC’s new guidance and take-home pay calculator to check payroll accuracy.
• Ask agencies or umbrella companies about how they are preparing for reform.
• Be cautious of schemes offering artificial bonuses or alternative payment methods.
• Stay informed through trusted sources to understand how new obligations could impact their take-home pay or working terms.

Awareness and vigilance now can help contractors avoid exposure to non-compliant practices down the line.

With legislative details still to come, we’re committed to keeping clients, partners, and contractors informed as the reform progresses. We’ll continue to monitor developments closely—particularly the draft legislation expected in July—and provide timely updates, guidance, and support to help you navigate the changes with confidence.