During the budget, the Chancellor of the Exchequer briefly referenced the need to tackle umbrella company compliance. The policy paper released on the same day provided more information and set out the government’s intention of how this will be achieved.

According to the paper at least 700,000 people were engaged by umbrella companies and of those, the government estimates that at least 275,000 were engaged by umbrella companies who failed to comply with their tax obligations.

It would be interesting to see a more detailed breakdown of these figures because a non-compliance rate of nearly 40% is staggering.

New umbrella companies can be formed and closed with ease after accumulating substantial sums for tax, national insurance and VAT without paying these to HMRC. This missing trader fraud is evident when looking at the published list of tax avoidance schemes that is littered with the names of umbrella companies.

Despite this, 40% does seem exceptionally high. Umbrella companies have been in supply chains for 2 decades and with billions of pounds passing through them, it seems unbelievable that this would continue for this long if that was the extent of non-compliance. Perhaps this includes those paid by umbrella companies on a “self-employed” basis which the government include within the non-compliance figure.

What is changing?

From April 2026 legislation will be introduced to make agencies responsible for tax and national insurance irrespective of whether they use an umbrella company. Where there is no agency in the contractual chain, the end client will face this responsibility.

Where there are multiple agencies in the supply chain, the agency that contracts with the end-client will be the one who is responsible for accounting for PAYE.

Does this signal the end for umbrella companies?

The Policy acknowledges the positive role compliant umbrella companies can play in the labour market. When operated correctly, umbrella companies offer agencies an important compliance, HR and administration function which will not disappear. The intention is that agencies who choose to outsource this function will be more accountable, carry out more due-diligence and ultimately pay the price if they use non-compliant businesses, therefore driving up standards and compliance.

The draft legislation is yet to be released and so it is unclear how umbrella companies and agencies will be defined. It is likely that a broad approach will be used to ensure it captures all is intended.