An umbrella company employs temporary workers on behalf of recruitment agencies and end clients, receives the assignment rate from the agency and pays the worker through PAYE after its own costs. Since 6 April 2026, new rules in Chapter 11 of Part 2 of ITEPA 2003 make the agency that contracts with the end client, or the client itself where there is no agency, jointly and severally liable for PAYE the umbrella company fails to account for.

How does umbrella employment work?

HMRC’s guidance on working through an umbrella company describes a chain of four parties. The client needs temporary workers and contracts with a recruitment agency. The agency finds the worker but asks them to be employed by an umbrella company, often one from its preferred list. The umbrella company becomes the worker’s employer and pays wages through PAYE. The worker does the work for the client.

Pay flows the other way. The worker sends a timesheet to the agency, the agency charges the client, the agency pays the umbrella company the assignment rate multiplied by the time worked, and the umbrella company pays the worker as employer. Before the worker starts, the agency must provide a key information document showing the umbrella company, the minimum assignment rate, what the umbrella will deduct and the minimum gross pay.

As employees, umbrella workers have the same employment rights as other employees, including at least the National Minimum Wage, paid holiday and, if eligible, automatic enrolment into a workplace pension. Many umbrella workers are in roles that a client has assessed as inside the off payroll working rules.

Why is gross pay lower than the assignment rate?

The assignment rate is not the worker’s salary. HMRC’s guidance says the umbrella company normally deducts its operating costs or margin, employer National Insurance, the employer pension contribution, holiday pay and, where it applies, the Apprenticeship Levy. What is left is the worker’s gross pay, from which income tax and employee National Insurance are taken. A reconciliation statement should show the breakdown.

HMRC’s payslip guidance gives a weekly example. An assignment rate of £25 an hour becomes a pay rate of £18.89 an hour once company costs and holiday pay are taken out. For 37 hours that gives basic pay of £698.93, plus holiday pay of £84.16, for total gross pay of £783.09, and income tax and National Insurance are then charged on the full £783.09. Some umbrellas pay the minimum wage for all hours and make up the rest with a bonus; GOV.UK says that is acceptable only if the bonus is taxed and shown on the payslip.

What do non compliant arrangements look like?

HMRC’s Spotlight 60 describes the most common avoidance model: disguised remuneration. Part of the worker’s pay is provided as a loan, salary advance, grant, annuity or another payment the worker is told they need not repay, and the umbrella company claims it is not taxable. The umbrella may benefit by avoiding employer National Insurance on that slice of pay, often while taking a larger margin. HMRC never approves avoidance schemes or the compliance of any umbrella company, and says the worker remains responsible for their own tax. Where the employer fails to deduct PAYE, HMRC may in some circumstances recover the tax from the worker directly.

HMRC’s payslip guidance lists warning signs for workers:

  • extra payments into the bank account, or messages about a separate amount, that are not processed through PAYE;
  • payments described as loans, annuities, bonuses, profit shares, fiduciary receipts, credit facilities, capital payments or pay advances;
  • a margin far above other umbrella companies, or similar in size to the tax and National Insurance that should be paid;
  • deductions grouped together on the payslip;
  • a very short employment contract, or terms hidden behind a hyperlink.

Spotlight 64 gives the signs agencies should watch for: incentives well above industry norms, different versions of payslips for the worker and the agency, payments to workers higher than their payslips show, payments routed through third parties, and umbrella companies based outside the UK. The line between arrangements that do not work and outright fraud is explained in our guide to tax avoidance and tax evasion.

Who is liable for unpaid PAYE from 6 April 2026?

Sections 61Y to 61Z1 of ITEPA 2003 apply to qualifying payments made on or after 6 April 2026. HMRC’s guidance at ESM2410 to ESM2430 sets out how they work:

  • Umbrella company. A third party that employs the worker and carries on a business of supplying labour, where the worker does not have a material interest of more than 5% in it. Businesses already deemed to be the employer under the agency, intermediaries or managed service company rules are excluded.
  • Relevant party. The agency that contracts with the client to supply the worker. If there is no agency, or the worker is placed through a non UK resident agency, the client is the relevant party.
  • Connected parties. If the agency contracting with the client is connected with the umbrella company, the client is also liable.
  • Amount. The full PAYE liability on the umbrella’s qualifying payments, including income tax, student loan deductions, employee and employer Class 1 National Insurance, and amounts paid as disguised remuneration such as purported loans. Where an umbrella pays one salary for work through several agencies, liability is apportioned between them.

Joint and several liability means HMRC can collect the whole amount from either the umbrella company or the relevant party. HMRC’s policy paper explains that HMRC can pursue the agency in the first instance, and that National Insurance is covered through a power to make equivalent regulations. Section 61Z1 also covers purported umbrella companies, such as one that produces fabricated employment contracts and payslips while actually paying workers gross (ESM2440 and ESM2445).

What should agencies and end clients do now?

The government’s stated aim is to put responsibility on the businesses that choose who enters a labour supply chain. Agencies cannot contract out of the liability, so the practical defence is not using non compliant umbrellas. Spotlight 64 recommends checking HMRC’s published list of named tax avoidance schemes, promoters, enablers and suppliers, and taking independent advice if unsure. Evidence of compliance needs to be tested, not just collected: HMRC’s own example of a purported umbrella company involves a specimen contract and payslips that were fabricated. HMRC’s page on its compliance approach for the new rules says only that more information will be provided in due course, so there is no published safe harbour. A business with workers supplied through a chain should know which agency holds the contract with it, because a client that contracts directly with an umbrella, or uses an overseas agency, carries the liability itself.

What happens when an umbrella in the chain fails?

Illustration only. A hospital trust contracts with Agency A for locum staff. Agency A uses Umbrella U, which pays each worker the minimum wage through PAYE and tops up the rest as a loan. In 2026 to 2027 HMRC finds that U has not accounted for PAYE on the loans and U has no assets. Because Agency A holds the contract with the trust, Agency A is jointly and severally liable for the PAYE U should have operated on the full pay, including the loans. If the trust had contracted with U directly, the trust would have been the relevant party instead.

How does this fit with the other intermediary rules?

ESM2405 explains that the umbrella rules do not usually apply where the worker is treated as employed under another set of rules instead: the agency legislation in Chapter 7, the intermediaries legislation in Chapters 8 and 10, the managed service company rules in Chapter 9, or the salaried members rules. HMRC’s guidance also notes that the government is working to bring umbrella companies within the legal definition of an employment business so that they are regulated through the Employment Rights Bill. For whether a worker should be employed at all, see our guide to the employment status tests.

What mistakes do workers and agencies make?

  • Workers choosing an umbrella because it promises higher take home pay. If the pay is higher than a correctly taxed figure, something is not being taxed.
  • Workers checking only the payslip and not the reconciliation statement or bank receipts.
  • Agencies relying on accreditation or a signed declaration instead of checking what workers actually receive.
  • Clients assuming the liability always sits with the agency, when contracting directly with an umbrella or through an overseas agency moves it to the client.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.