Umbrella companies are commonly used to employ workers on behalf of recruitment agencies and end clients. However, starting from April 2026, HMRC will introduce changes to address non-compliance with tax obligations by some umbrella companies.
HMRC analysis shows that around 40% of umbrella companies engaging workers for 2022/23 failed to comply with their tax obligations.
It is relatively easy to create an umbrella company, so the individuals behind non-compliant businesses can quickly establish new companies and relaunch them into the umbrella company market.
Change in responsibility
From April 2026, responsibility for accounting for PAYE and national insurance contributions (NICs; including employer NICs) will move from the umbrella company to the recruitment agency that supplies the worker to the end client. Where there is no agency in a labour supply chain, responsibility will sit with the end client:
- Recruitment agencies and end clients will still be able to contract with umbrella companies exactly the same as they do now.
- However, if the umbrella company fails to remit the correct amount of tax and NICs to HMRC, the recruiter or the end client will in future be liable for any shortfall.
- Workers should benefit, since, by avoiding being a party to non-compliant tax arrangements, they will not end up facing large, unexpected tax bills.
The logic behind the change in responsibility is that recruitment agencies and end clients can generally choose who they want to work with, so in future they will be careful not to deal with illegitimate operators.
Going forward
Smaller employment agencies will probably want to continue outsourcing the payroll function to umbrella companies. Given the potential cost of using a non-compliant company, agencies – and maybe end clients – should be more careful than ever in undertaking due diligence checks and/or having legal indemnities in place.
While the changes won’t take place until April 2026, it is advisable for updated systems should be in place well before then. Contracts will need to be scrutinised and fee arrangements re-evaluated.
HMRC’s policy paper explaining how it will tackle non-compliance in the umbrella company market can be found here.
For more information, contact us on 0114 266 4432 or email info@smh.group.
Comments are closed.