Government announce decision on tackling non-compliance in umbrella company market

The Low Incomes Tax Reform Group (LITRG) has responded to today’s Budget announcement¹ that from April 2026 recruitment agencies, or end clients where there is no agency, will be responsible for accounting for PAYE tax and NIC on payments made to workers that are supplied by umbrella companies. 

A consultation in 2023 set out three options² for reducing tax non-compliance in the umbrella company market. LITRG’s response highlighted our preference for options 1 and 2³. Today’s announcement implements Option 3.

Victoria Todd, Head of LITRG, said:

“It is welcome that we finally have a decision on which option the Government plan to take forward to tackle non-compliance in the umbrella company market. This announcement sends a firm message that the government wants to protect workers from problems like disguised remuneration and tackle the behaviours of some unscrupulous umbrella companies whose actions have had a significant and negative impact on the life and well-being of low-income workers.

“Action to tackle non-compliance in the umbrella market, which also includes the mini umbrella company issue, is long overdue. Although we would have preferred the government to either introduce a mandatory due diligence requirement or a debt transfer provision, the significant loss of tax revenue from these practices and the new government’s focus on tackling the tax gap are likely drivers of the decision to move forward with the alternative option.

“However, there are a number of consequences that might flow from today’s announcement. For instance, although it does not stop employment businesses/agencies from using an umbrella company or payroll company to discharge their PAYE obligations, it is likely that some agencies will simply stop using umbrella companies. While this does respond to some of our concerns in terms of impact on workers, it also means that some good umbrella companies, who arguably have a legitimate role to play in the current labour market, may leave it.⁴ There is also the risk that the same concerning issues may arise within agency payroll, which just shifts the problem.⁵ 

“It is essential that HMRC have a good understanding of the potential implications of their plans on the wider labour market, including the support that workers will need to understand any changes to how they are engaged.⁶ HMRC must also ensure that they enforce these new provisions, otherwise the same problems will continue to exist and the benefits to workers and the exchequer will not be fully realised.”