In July 2025, the UK Government introduced new draft legislation that will dramatically reshape how umbrella companies operate and how authorities hold them accountable. Set to take effect on 6 April 2026, the reforms aim to address long-standing problems of tax avoidance and worker exploitation in the umbrella sector.
Why Has This Been Introduced?
The umbrella company market has grown rapidly in recent years, with over 700,000 workers currently operating under umbrella arrangements. However, HMRC identified that nearly 40% of these workers are employed by firms that do not comply with tax law.
Over £500 million has been lost through umbrella company tax avoidance schemes. These schemes have left thousands of workers exposed to unpaid taxes.
Key Changes
Joint PAYE Responsibility
Starting 6th April 2026, recruitment agencies that supply workers through umbrella companies will share responsibility for making sure the correct tax is paid. This enables HMRC to pursue any party in the chain, including agencies and end-clients for unpaid PAYE—even if they weren’t the direct employer. The entity that has a direct relationship with the end-client is likely to be the most susceptible.
Legal Definition
The Employment Rights Bill will explicitly amend the statutory definition of an “employment business” to include umbrella companies. Since the law previously did not define umbrella companies, regulators typically excluded them from existing regulations. However, by bringing them within the Conduct of Employment Agencies and Employment Businesses Regulations 2003, the legislation enables regulators to monitor and enforce standards over umbrella operations.
How Does This Affect You?
Agencies
Agencies that place workers via umbrella companies will now share legal responsibility for PAYE. They must implement formal, documented vetting processes for umbrella providers. This includes reviewing contracts, requesting proof of compliance, and maintaining regular oversight of payroll accuracy and worker treatment. Failing to comply will expose you to penalties from HMRC, severely damage your agency’s reputation, and risk removal from preferred supplier lists.
Contractors
The inclusion of umbrella companies in the Employment Rights Bill means they will be in scope of the government’s new enforcement body, the ‘Fair Work Agency’, to ensure contractors with an umbrella are getting the correct statutory entitlements and rights.
Contractors must ensure the umbrella company is not just attractive take-home pay but is also fully compliant with employment law and HMRC standards. The wrong choice could result in unexpected tax bills or legal issues down the line.
End Clients
If you engage workers through an umbrella company without using an agency, the tax responsibility now falls on your organisation. This is especially relevant in industries where outsourcing or project-based hiring is common.
It’s crucial that you thoroughly vet the umbrella company before engaging with them to ensure they are compliant with all tax laws and that workers are not being denied basic statutory rights. You should consider creating an approved provider list of any umbrella companies for which you have received proof of compliance from.
How Trafalgar Umbrella Sets the Standard?
For 25 years, we’ve been handling payments, tax, admin, and so much more for our contractors, ensuring compliance and efficiency every step of the way.
- FCSA Accredited and veriPAYE secured
- Full PAYE compliance
- Full employment rights
- Fast, reliable payments
- Full supply chain support
If you’re a recruitment agency, end client, or contractor looking to stay compliant, protect your workforce, and reduce risk across your supply chain, Trafalgar Umbrella is the partner you can trust. We don’t just follow the rules; we help shape best practices. Get in touch today.