The umbrella company industry will undergo major reform in a bid to protect self-employed workers from tax avoidance schemes.
The changes were announced in the Budget document published after Rachel Reeves’ first Budget as Chancellor last week.
Umbrella companies operate as the intermediary between a temporary worker and their end client, taking on the responsibility for calculating, deducting and paying PAYE income tax.
However, about 100 of these businesses claiming to be umbrella companies have been identified by HMRC as tax avoidance schemes or promoters of these schemes.
By avoiding tax, often promising to remunerate flexible workers in non-taxable loans, these schemes can leave flexible workers who operate through them with unpaid tax bills.
Labour plans to prevent these tax avoidance schemes from luring in unsuspecting workers, only to leave them with unpaid tax bills.
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What’s changing?
It was announced in the Budget that, from 2026, it will become the end client or, when involved, recruitment agency’s responsibility to ensure an umbrella company is deducting the correct tax from the worker. Failure to ensure this will mean these parties become liable for unpaid taxes.
This reform is expected to raise as much as £895m in tax for the Treasury in its first year of implementation (2026/27).
A spokesperson for Qdos, a tax insurance provider, said: “This is a major shake-up to the umbrella industry and one that could help protect hundreds of thousands of flexible workers from the scourge of tax avoidance schemes. The fact that so many of these schemes operate so freely, luring in unsuspecting, hard-working people, remains a massive issue in the world of flexible working.
“These schemes promise the world, avoid tax and very often disappear into thin air, only to leave the worker – who ultimately has been scammed – with a tax bill hanging over them. It’s why any move to put a stop to these rogue operators, which tarnish the reputation of the many compliant umbrella companies in existence, is arguably a step in the right direction.
“By encouraging businesses to carry out their own due diligence and carry the can for engaging a non-compliant umbrella, flexible workers will be able to enter into these engagements with more confidence and won’t, in theory, have nasty surprises further down the line.”
