Umbrella companies and IR35 rules: what you need to know
Umbrella companies and IR35 rules: what you need to know
It is well known that successive Governments and HMRC consider some umbrella companies to be a source of tax loss to the Exchequer and potential exploitation of workers’ rights. Umbrella companies contract out workers to other organisations, and the responsibilities surrounding off-payroll labour/IR35 rules can become blurred – see our flowchart for end engagers.
What is an umbrella company?
There is currently no statutory definition of an ‘umbrella company’. Generally speaking, an umbrella company refers to a company that employs temporary workers who work at different end clients’ premises.
Typically, umbrella companies enter a contract with a recruitment agency, who sources work from end clients.
Depending on the number of parties in the labour supply chain, an umbrella company may be the ‘fee payer’ for off-payroll labour purposes and be obliged to deduct PAYE and NIC before paying the worker – read more on each party’s responsibilities.
Legislation updates for umbrella companies
On 21 July 2025, following up on the consultation on tackling non-compliance in the umbrella company market, the Government published draft legislation meaning end clients, agencies and umbrella companies could be jointly and severally liable for correct PAYE/NIC compliance from 6 April 2026.
Recognising the role of compliant umbrella companies, the Government has rightly rejected calls to ban umbrella companies completely. In theory, the new rules should mean little practical change for all parties where the umbrella company accurately operates PAYE on the workers – so compliant companies may not see much impact.
However, for agencies and end clients using the workers, there will be new risks and, for the prudent, a greater administrative burden in checking that the umbrella company is operating PAYE correctly.
How the new rules will work
As now, the umbrella company will retain the primary responsibility for deduction PAYE and NIC from the pay of the workers they supply. However, if this does not happen, the responsibility to account for PAYE and NIC will shift to the recruitment company. If there is no recruitment company in the chain, the responsibility will sit with the end engager organisation (for whom the work is carried out).The new liability will not apply to non-UK resident end clients, agencies or umbrella companies, however, but where there is at least one UK resident party in the chain, that party will be liable.
Equally, the new rules do not cover situations where the worker is via supplied via a personal service company rather than an umbrella company – that position is already covered by the off-payroll labour rules.
Protecting your business
It is clear that there will be greater scrutiny of umbrella companies in future. If your business is involved with umbrella companies as an agency or end engager organisation benefitting from the worker’s services, you will need to be comfortable that the umbrella company is compliant with all necessary obligations. If the companies you engage with are not compliant, there will be tax risks for you, as well as potential reputational issues.
Key questions to consider when using agency workers:
- How can you ensure the agency/umbrella company are acting in good faith and ensuring the correct PAYE is paid to HMRC for workers supplied to your business?
- How are you protected if the agency/umbrella company fail to pay PAYE and NIC correctly? Can you have effective indemnities added to the agency contracts you use?