Umbrella company tax compliance changes
What is an umbrella company?
An umbrella company is an intermediary entity that engages individuals, typically as employees, to provide services to clients. The most common example would be an employment agency providing temporary workers to third parties, but any agency that pays people who are actually working for a third party will come under this new legislation.
What are the rules today?
The umbrella company is responsible for administration relating to the workers and, at present, is responsible for the correct operation of PAYE and NICs.
Because of this, they are often engaged to outsource employment tax compliance and risk. For large organisation there are often ‘approved suppliers’, but not all the people who work in the organisation are full-time staff of that supplier, many are smaller companies who operate as contractors (not affected by the new ruling) and individuals who are, essentially employed by the approved supplier, but actually work for another organisation.
What changes from 6 April 2026?
From 6 April 2026 the client and the umbrella company will each be jointly and severally liable for the PAYE and NICs due on payments to the worker.
This means HMRC may pursue either party for the full amount, and whoever ends up paying HMRC will then need to seek contribution or reimbursement from the other. The client will therefore be potentially liable for the failed compliance of another party in the ‘contractual chain’.
If pensions are not paid, or the hourly rate falls below the National minimum wage, or a wrong tax code has been applied, the end user can’t pass the buck back to the agency.
Getting your terms of employment right – The challenges
Typically the end user doesn’t see what their temporary or contracted employees get paid. They will pay the agency or umbrella company an agreed rate per hour for that individual, this usually includes the agency’s fee, so is not actually what the person doing the actual work ends up getting paid.
To enable the end user company to be able to respond to HMRC, agencies will now need to provide payroll evidence to each company to whom they provide staff. This can be a logistical nightmare and end up costing the agency much more in processing time.
The new legislation requires businesses using umbrella companies to perform greater due diligence on their supply chains to ensure tax compliance. While well intended, this is likely to increase the compliance burden on businesses already feeling the strain.
If you have any questions regarding this change, then please feel free to get in touch today and our expert team will be more than happy to assist you!
