Umbrella companies typically employ temporary workers on behalf of recruitment agencies and end clients. However, this structure leaves room for umbrella company fraud and tax avoidance, which is why they’re often under HMRC’s spotlight.
In 2022–2023, around 40% of umbrella companies didn’t comply with their tax obligations – but it isn’t difficult to form an umbrella company, so the individuals behind them can easily launch new ones after being shut down for non-compliance.
HMRC will therefore be making some changes to tackle non-tax-compliant umbrella companies, which will take effect from the start of the 2026–2027 tax year.
Changing PAYE and NIC responsibilities
From April 2026 onwards, the accounting responsibility for PAYE and National Insurance Contributions (NICs) – including employer NICs – will transfer from the umbrella company to the recruitment agency that supplied the worker.
If there is no recruitment agency in the labour supply chain, then these accounting responsibilities will move to the end client. This should encourage recruiters and end clients to make sure they don’t deal with illegitimate companies.
They can still contract with umbrella companies in the same way as before, but if an umbrella company fails to account for the right amount of Income Tax and NICs, the recruiter or end client will then be responsible for any shortfalls.
In turn, workers will benefit from recruiters and end clients avoiding non-compliant operators, as they won’t have to worry about facing unexpected tax bills.
Avoiding non-compliant umbrella companies
Smaller employment agencies will likely continue to outsource payroll functions to umbrella companies for convenience, but given the potentially high cost of using a non-compliant umbrella company, agencies – and end clients – should undertake diligent checks and ensure legal indemnities are in place.
While the new rules won’t come into force until next year, it’s advisable to update systems, scrutinize contracts, and re-evaluate fee arrangements well in advance.
For more information, you can read HMRC’s policy paper on the agency’s plans to tackle tax non-compliance in the umbrella company market.
It may also be beneficial to speak to financial advisers like our accountants in Barnsley, as the team here at gbac can offer a range of payroll and tax management services to ensure total compliance with HMRC.
To learn more, call 01226 298 298 or email an enquiry to info@gbac.co.uk.