Government crackdown on umbrella companies will protect workers

What are umbrella companies?

Umbrella companies are labour market intermediaries that, generally, become the employer of umbrella workers. They take on the obligations relating to employment rights, payment of workers, and paying the relevant taxes.

What are the issues with umbrella companies?

Umbrella companies are used across all sectors of the labour market – by agency workers and self-employed contractors – and unions have reported that people working under these arrangements experience a multitude of problems ranging from a lack of transparency over core terms and conditions such as pay rates, to unwittingly becoming embroiled in fraudulent tax arrangements with serious financial consequences. HMRC analysis shows that umbrella companies were used to engage at least 700,000 workers in 2022 to 2023. This analysis also shows that 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. HMRC data shows that £500 million was lost to disguised remuneration tax avoidance schemes in 2022 to 2023, almost all of which was facilitated by umbrella companies.

Unions have reported the following common issues caused by working under umbrella arrangements:

• Workers face misleading and unfair deductions from pay. An agency worker using an umbrella company will often not receive the pay rate advertised by the agency.  
• Some umbrella companies do not pay all the money owed to a worker or to HRMC and when they try to resolve the problem, find themselves being passed between agency, umbrella and the organisation they are carrying out the work for.  
• Payslips are often indecipherable. Umbrella company payslips are more confusing than usual payslips. This is often down to the inclusion of the ‘contractor statement’ as well as the actual payslip. This contractor statement starts with the contractor’s overall invoiced amount and then lists the employer deductions, including the umbrella company’s margin and employers’ NIC, Apprenticeship Levy payments and so on. This is particularly confusing for the many workers who are unaware that they are working through umbrella arrangements or what this entails.  
• Breaches of holiday leave and pay entitlement are widespread, with umbrella companies preventing workers from taking their holiday.  
• Workers often have no choice but to use umbrella companies, if they want to be given work.

Even the previous government, with its repeated failures to introduce an Employment Bill, recognised that umbrella companies are an issue for workers. They carried out a consultation on potential measures to tackle non-compliance in the umbrella company market, where they acknowledged the exploitative nature of umbrella companies:

“This creates scope for practices by some umbrella companies that lead to negative outcomes for individuals (including pay or holiday pay being withheld) and for businesses. There are often no practical consequences for the umbrella company for non-compliance with employment law, given the lack of state enforcement and the low rate of individual enforcement against them as employers.”

What is the government proposing?

The government will implement legislation to change who has responsibility to account for Pay As You Earn (PAYE) where an umbrella company is used in a labour supply chain to engage a worker. This will move the responsibility to account for PAYE from the umbrella company that employs the worker to the recruitment agency that supplies the worker to the end client. Where there is no agency in a labour supply chain, this responsibility will sit with the end client. This will take effect from April 2026

Where an umbrella company fails to pay the correct tax, recruitment agencies or end clients will pick up the bill.  

Why is this a good thing?

Workers are less likely to be forced to work under exploitative umbrella arrangements. Exploitative umbrella companies will be weeded out of the market, as recruitment agencies will not want to risk working with unlawful operators.

This is also good news for businesses, who will now be better protected from undercutting by those who are avoiding tax, and for the wider public finances. This measure is expected to protect around £2.8 billion from being lost to umbrella company non-compliance.

What further action is needed?

It is welcome that the government is taking steps to tackle tax avoidance by many umbrella companies. This must now also be followed by wider action to tackle the employment rights abuses carried out by umbrella companies (a challenge that the previous Conservative government’s consultation also recognised).

The Labour government’s proposals for a new Fair Work Agency provide the framework to tackle employment rights breaches committed by umbrella companies. The Employment Rights Bill gives the Secretary of State the necessary powers to extend the remit of the new FWA to regulate umbrella companies.

Ultimately, trade unions want to see the use of umbrella companies prohibited. We’ve heard too many examples of umbrella workers suffering egregious exploitation to be convinced that umbrella companies have a legitimate role in the labour market. But today’s move to ensure that where they are operating, tax avoidance is addressed, is an important step towards a stronger, fairer jobs market.