HMRC to shift tax responsibility in umbrella company reform
As provisionally announced at the 2024 Autumn Budget, the Government has now confirmed that it will be moving forward with plans to increase regulation of umbrella companies from April 2026 – with particular focus on employment tax treatment.
This follows the recent publishing of the outcome of a consultation which was launched by the previous Government in 2023 on tackling non-compliance within the umbrella company market.
What is an umbrella company?
An umbrella company acts as an intermediary which employs workers on behalf of a recruitment agency or end client. Umbrella companies are regularly used by businesses to manage payroll for contractors they use. Whilst the umbrella company approach can be a practical employment solution for all involved, it has sometimes been used as a method of tax avoidance.
Prior to the launch of the consultation in 2023, the Government estimated that 700,000 temporary workers in the UK were engaged by umbrella companies, with at least 275,000 of those workers being engaged by an umbrella company which was not tax compliant.
HMRC has in recent years been increasingly focused on umbrella companies, especially in relation to fraudulent activities such as, mini umbrella company fraud, travel and subsistence schemes, VAT and hidden ‘skimming’ of workers' pay.
HMRC has a dedicated Umbrella Companies team and are currently focused on supply chains in construction, logistics, hospitality and care.
What changes are being made?
In March 2025, it was announced that umbrella companies would be brought into the definition of employment businesses to allow them to be regulated.
From 6 April 2026, the responsibility for accounting for National Insurance contributions (NIC) and pay as you earn (PAYE) will be moved from the umbrella company to the recruitment agency, or to the end client if a recruitment agency is not involved.
Once this change has been made, if an umbrella company fails to pay NIC and/or PAYE to HMRC, the recruitment agency and contractors who have been working directly with the umbrella company will be contacted.
How can you prepare?
With the implementation of these changes only six months away, you can prepare by:
- Reviewing your policies and procedures for ‘off-payroll’ workers to ensure that, in addition to addressing tax status and IR35, due diligence is undertaken on your supply chain.
- This due diligence should include obtaining documentation from the supply chain to show there is tax compliance.
- Ensuring due diligence is carried out on any new umbrella providers.
- Regular auditing of your supply chain to identify when any new issues arise.
We’re here to help
If you would like any further advice or assistance on how to prepare for the upcoming changes, get in touch with a member of our specialist Employment Tax team via the form below.
