The UK Treasury released stakeholder responses to a consultation on tackling non-compliance in the umbrella company market on 4 March 2025.

The government plans to amend the Employment Rights Bill to regulate umbrella companies and place them under the Employment Agency’s oversight. From April 2026, the responsibility for deducting income tax and National Insurance contributions will shift from umbrella companies to recruitment agencies, or, if no agency is involved, to the end client. This reform is designed to enhance worker protection and strengthen tax compliance.

An umbrella company is a business that employs agency contractors on temporary assignments, usually through a recruitment agency in the UK. Acting as an employment intermediary, it hires individuals on behalf of recruitment agencies, which then place them with end clients. Although the umbrella company does not receive services directly from the contractor, it is the legal employer and is presently responsible for deducting income tax and National Insurance contributions from payments, as well as making the required employer contributions.

Umbrella companies hire workers on fixed-term contracts and serve as intermediaries between contractors and their agencies or end clients. The agency pays the umbrella company, which then pays the contractor through PAYE, similar to how a full-time employee would be paid. This setup ensured that tax and National Insurance contributions were deducted automatically by the umbrella company, streamlining the contractor’s administrative and financial tasks. As a result, contractors didn’t need to worry about handling tasks like filing tax returns.