Umbrella companies will no longer be “legally” responsible for operating PAYE payments

The UK government has announced a major shake-up of the temporary labour market, aiming to tackle widespread tax avoidance within the umbrella company sector and improve conditions for workers.

Legislation will be introduced that will shift the responsibility for Pay As You Earn (PAYE) from the umbrella company to the recruitment agency supplying the worker. In cases where no agency is involved, the end client will bear the responsibility. This change will come into effect from April 2026.

“Umbrella companies will no longer be legally responsible for operating PAYE on payments to the workers that they employ,” the government has stated in a policy paper.

“Workers will continue to receive their pay net of income tax and NICs following the introduction of the measure, although the business providing their payslip may change,” said the Policy Paper.

By reducing non-compliance in the umbrella company market, the government believes this measure will “prevent workers from being engaged by non-compliant umbrella companies”.

By placing the onus on recruitment agencies and end clients, the government aims to incentivise greater due diligence and ensure workers are paid correctly and taxed appropriately.

The end aim? Workers will no longer be party to non-compliant tax arrangements that could otherwise have left them facing large, unexpected tax bills.

“The move to clamp down on non-compliant umbrella companies that lure in unsuspecting workers – only to leave them with devastating tax bills – has been a big discussion point for some time,” says Seb Maley, CEO of contractor insurance form Qdos.

Maley continues, “From 2026, making recruiters and businesses responsible for ensuring the correct PAYE deductions is designed to help protect the 700,000 or so people working via these intermediaries. In some ways, the government is asking the wider supply chain to police the compliance of umbrella companies and carry the can from a tax perspective if tax avoidance has taken place.”

Just how big is the umbrella market’s tax avoidance problem?

HMRC analysis reveals the staggering scale of tax avoidance facilitated by umbrella companies, which were used to employ at least 700,000 workers in 2022-23. “At least 275,000 of these workers, and likely significantly more, were engaged at some point in 2022 to 2023 by umbrella companies that failed to comply with their tax obligations,” said the government. 

This resulted in an estimated £500 million lost to disguised remuneration schemes, leaving many workers facing unexpected tax bills. Hundreds of millions more were lost to fraudulent activities, including the use of ‘mini umbrella companies’.

Once implemented, the measure is expected to protect around £2.8 billion from being lost to umbrella company non-compliance across the scorecard period to 2029 to 2030, according to the government.

Industry experts have welcomed the announcement, with many highlighting the need for urgent action to address the “wild west” atmosphere that has pervaded the umbrella company sector. However, some have expressed concerns about the potential for increased administrative burden on recruitment agencies and end clients.

“The plans also published today to introduce PAYE obligations on companies and agencies which use umbrella companies are sensible and expected,” says Dave Chaplin, CEO of ContractorCalculator. “The Budget document indicates that this will raise £895m in 2026-27,  which is a clear indicator of the level of non-compliance in the current market.”

Change of heart over loan charge?

The Budget also revealed potential hope for Loan Charge victims. “The Chancellor has also stipulated in the budget detail that an independent review of the Loan Charge will be commissioned which is most welcome and HMRC must be held accountable for this punitive retrospective tax which has had devastating consequences,” says Chaplin, “with some affected individuals tragically taking their own lives due to the immense pressure. The human cost of this heavy-handed and poorly implemented policy cannot be overstated.”

Next steps: an online tool to understand pay from umbrellas

The government has pledged to work closely with businesses and stakeholders to ensure a smooth transition and minimise any disruption. It remains to be seen how effective these measures will be in tackling the deep-rooted issues within the temporary labour market, but the government’s commitment to reform signals a significant step towards a fairer and more efficient system.

The government will set out full details of how this measure will operate in the coming months, alongside draft legislation ahead of its introduction to Parliament as part of Finance Bill 2025.

In the meantime, the government said it will shortly publish an online tool to help workers and agencies understand pay from umbrella companies, as well as further guidance.

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