Umbrella company tax reforms now in force

Umbrella company tax reforms have now come into force, introducing what recruiters and compliance specialists have described as the most significant shake-up to the temporary labour market since the private sector IR35 reforms were introduced in 2021.

From 6 April, responsibility for unpaid PAYE and National Insurance Contributions linked to umbrella workers has shifted up the labour supply chain. Under the new rules, the umbrella company and the client can now be held jointly and severally liable for tax that should have been deducted from a worker's pay. In practical terms, this means HM Revenue and Customs can pursue either party for the full amount owed, leaving them to recover costs from one another afterwards.

However, where another party such as a recruitment agency sits between the end client and the umbrella company, it is generally that contractual party "above" the umbrella that carries the risk, rather than the end hirer. That has put recruitment firms at the centre of the reform, with agencies now under pressure to ensure every umbrella company they engage is compliant, financially sound and correctly operating payroll.

An umbrella company is a kind of intermediary employer for temporary workers and contractors, handling their payroll, tax, and other employment obligations.

The changes are intended to tackle tax avoidance schemes that have long operated through the umbrella market, often presenting themselves as legitimate payroll providers while failing to deduct the correct taxes. They are expected to have wide-reaching consequences across the UK's flexible workforce, which includes an estimated 700,000 people working through umbrella structures.

The legislation also contains anti-avoidance provisions designed to prevent businesses from sidestepping the reforms through artificial arrangements. In cases where a worker is not formally employed by the umbrella company, but is effectively working under what amounts to an employment relationship, the rules can still apply.

It's arguably the biggest regulatory shift impacting the flexible workforce since the off-payroll working rules came into force in the private sector" - Sam Cox, UmbrellaSure

The impact may also be felt by businesses using employers of record (EORs), which employ staff on behalf of clients and then supply those workers to end users. Because EORs fall within the new legal definition of an umbrella company, clients using them could also face unexpected tax exposure if payroll is not handled correctly, particularly where overseas entities are involved in the contractual chain.

Sam Cox, spokesperson for UmbrellaSure, said the reforms mark a decisive shift in how compliance is enforced. "The industry is now operating under one of the most fundamental tax reforms in years - arguably the biggest regulatory shift impacting the flexible workforce since the off-payroll working rules came into force in the private sector.

"This is a clear push towards self-policing. Much like the IR35 reforms, liability has moved up the chain - and with that comes significant risk to recruiters engaging a non-compliant umbrella company or even one that isn't financially robust and becomes insolvent."

Cox said agencies should act quickly to reduce their exposure. "Recruitment businesses are now firmly in the firing line. If you work with the wrong umbrella company, you could be exposed to significant tax liabilities.

"This isn't simply a box-ticking exercise. Agencies must urgently review their preferred supplier lists, ensure they are tightly controlled, and avoid any off-PSL engagements. Above all else, this reform underlines the need for robust, proactive risk mitigation."

For businesses already navigating IR35, right-to-work checks and wider contingent labour obligations, the new rules add another layer of compliance risk at a time when scrutiny of labour supply chains is intensifying.