The Government will introduce legislation that changes who is responsible for the tax and national security liabilities when an employer uses an umbrella company.
Rachel Reeves, the chancellor of England and Wales, pledged in today’s Autumn Budget to crack down on umbrella firms that “exploite” workers by not complying with IR35 obligations off-payroll.
Briefing Document, released today by HM Revenue and Customs, indicates that the Government will go a little further and bring forward legislation to change who is responsible for Pay As You Gain (PAYE), when an umbrella company has been used. The legislation will be implemented from April 2026.
The proposed legislation will make agencies who use umbrella companies accountable for making sure that income tax and National Insurance are correctly deducted and paid to HMRC. The employer, or the client in the absence of an agency, would be responsible for the correct deduction and payment to HMRC.
A umbrella company is a type of employment intermediary which employs workers for recruitment agencies or their clients. They are often used by contractors because they provide convenience and administrative advantages.
According to HMRC, HMRC’s analysis shows that at least 275,000 employees who worked for umbrella companies during the tax year 2022-23 were working with umbrellas which failed to meet their tax obligations.
Over that time, it is estimated that “disguised tax avoidance schemes”, which are facilitated by umbrella firms, cost around PS500,000,000.
According to the new rules either the agency, or the employer, would be legally responsible for any shortfall. This is true whether the agency, or the employee, ran the payroll themselves, or if they used an umbrella company.
The government stated that this means workers who are employed by umbrella companies will have the same tax status as “any other agency worker”.
The document explains that “the umbrella company model is more popular because it allows people to avoid the obligations of this legislation.”
This measure ensures that PAYE obligations are the same for all agency workers, regardless of their employment status.
The Finance Bill 2025 will include draft legislation that will provide more information on how the new rules work.
HMRC will be engaging with stakeholders in the interim to get feedback on the proposed measures and gauge their impact. In due course, technical guidance will be released.
The Conservative Government published last year a response in response to an evidence request on umbrella companies. It proposed new ways to define them, mandated better due diligence for compliance, and increased regulation.
Crawford Temple, CEO at Professional Passport, stated that the latest move will “change the shape” of the market and increase the need for “robust” enforcement measures in advance of the new legislation.
He said: “The next few months will see the tax avoidance scheme architects trying to earn as much as possible.
“The message is clear: visible and targeted enforcement will drive up standards, and drive out cowboys who give our industry a poor name. We need enforcement and action, not promises and pledges.
Neil Carberry of the Recruitment and Employment Confederation said that the chancellor was right to address issues surrounding umbrella company compliance, but he chose the wrong tool.
The supply chain compliance of employment businesses will be a challenge for them. They are already heavily regulated. The umbrella companies are not regulated. It is long past due and would create a level playing field.
Matt Fryer said, “We welcome the announcement today that the new Government is moving forward with plans to address non-compliance on the umbrella company’s market. It feels more like a rehash than a radical reform.
The movement is going in the right directions, aiming to close down umbrellas that are not compliant and drive agencies, workers and hirers to providers who are. The treasury still seems to believe that end-hirers or agencies should ultimately be responsible for calculating PAYE. The treasury will be liable for any non-compliance if there are no agencies in the supply chain.
He said that the mechanics behind how it is supposed to work at this point appear to be “a little confused”.
To avoid tax penalties and fines resulting from a clampdown on enforcement, we recommend that hirers ensure they have in place a compliant preferred list of umbrella companies, conduct due diligence, and work with trusted and established providers. It is also advisable that IR35 policies are reviewed to ensure that contracts do not fall into the off-payroll regulations unnecessarily, and that independent contractors are engaged in a compliant manner outside.
HMRC also said that it would “shortly publish” an online tool to help workers understand the pay of umbrella companies.
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