Government Takes Action to Curb Tax Avoidance by Umbrella Companies 

By James Lenihan Member, Employment Rights Manager

 & William Webb Employment Lawyer

The government has announced new measures aimed at tackling tax avoidance among umbrella companies, responding to long-standing concerns from unions and workers’ advocates about the impact of these companies on workers’ rights and public finances. From April 2026, new legislation will change the tax accountability structure for workers hired through umbrella companies, shifting the responsibility for Pay As You Earn (PAYE) obligations away from umbrella companies and placing it on recruitment agencies or end clients in the labour supply chain. This move is expected to curb tax avoidance practices while providing greater protections for workers across the UK. 

What Are Umbrella Companies? 

Umbrella companies serve as intermediaries in the labour market, acting as the employer for agency workers or self-employed contractors. They are responsible for meeting employment rights obligations, paying workers, and handling taxes. Used across a range of sectors, umbrella companies currently engage over 700,000 workers in the UK, according to recent HMRC data. 

Key Issues with Umbrella Companies 

Reports from unions highlight serious issues faced by workers engaged under umbrella arrangements, including opaque pay practices, unfair deductions, and misleading payslips. Many workers report being unaware of the exact terms and deductions in their pay, with some finding themselves unexpectedly entangled in fraudulent tax schemes, resulting in significant financial consequences. 

HMRC estimates that £500 million was lost to tax avoidance schemes facilitated by umbrella companies in the 2022-2023 period. Moreover, at least 275,000 workers were engaged by umbrella companies that failed to comply with tax obligations, compounding the challenges faced by workers who are often unable to recover lost income. 

What the New Legislation Proposes 

The government’s new proposal will require recruitment agencies, or end clients where no agency is involved, to take responsibility for PAYE tax obligations when an umbrella company is used. This change aims to protect workers from unscrupulous practices by making the recruitment agencies and end clients accountable for any unpaid taxes, effectively reducing the reliance on often non-compliant umbrella companies in the labour supply chain. 

Potential Positive Outcomes 

By shifting tax accountability, the government hopes to reduce the prevalence of exploitative umbrella company practices. This reform is expected to protect approximately £2.8 billion in public funds that would otherwise be lost to tax non-compliance. For workers, the change also signals a step toward fairer treatment and less pressure to engage in potentially exploitative work arrangements. 

The new rules could also benefit compliant businesses, which have struggled to compete with those who avoid taxes by using unlawful umbrella company practices. Recruitment agencies are likely to avoid working with non-compliant umbrella companies to protect themselves from future liability. 

What’s Still Needed? 

While these changes mark an important step forward, advocates argue that broader action is needed to address employment rights abuses associated with umbrella companies. Trade unions have long called for tighter regulation, if not an outright ban, on umbrella companies, as workers continue to experience severe exploitation under these arrangements. 

Labour’s proposed Fair Work Agency (FWA), under the Employment Rights Bill, could play a crucial role in regulating umbrella companies and addressing employment rights violations within the sector. Extending the FWA’s remit to oversee umbrella companies would strengthen enforcement and help protect workers’ rights. 

Conclusion 

The government’s new legislation is a welcome move towards ending tax avoidance practices by umbrella companies, offering potential relief to both workers and businesses affected by exploitative practices in the labour market. Although further regulation is needed to address the full range of issues, these changes are a significant first step toward a fairer and more transparent job market.