Published October 2021 and kept as a record. The figures and the law have moved on since it was written. For the current position see the Employment Rights Hub. Note added 21 October 2026.
If you’re a UK agency or business placing or using temporary labour, find out what you can do to reduce your risk of using a non-compliant umbrella company.
HMRC Guidance
HMRC has released new guidance on umbrella companies designed to help contribute to compliance with employment laws. Recruitment agencies that work with, or plan to work with them in the future, are recommended to prepare for the upcoming changes.
The guidance focuses on umbrella company non-compliance involving disguised remuneration schemes, but there are other ways an umbrella company can be non-compliant. These range from being involved in mini-umbrella company fraud to payroll fraud.
Umbrella companies & avoidance schemes
Agency workers can normally be employed via an umbrella company. This has the advantage of relieving an agency of the administrative burden of operating HR and payroll, allowing it to focus on its core business of finding and allocating work assignments.
Many umbrella companies are compliant with tax rules, but there are also many that are non-compliant, which includes those that operate tax avoidance schemes known as disguised remuneration schemes.
Disguised remuneration schemes attempt to avoid the need for employers to deduct income tax and National Insurance contributions (NICs) from payments made to workers. One way umbrella companies avoid paying taxes is to describe taxable earnings as non-taxable. For example, loans or salary advances. The purpose of the scheme is to enable workers to receive untaxed payments and increase their take-home pay. However, most tax avoidance schemes are unsuccessful, and many have been challenged in courts by HMRC. Workers utilising these schemes often end up paying more in the long run, in the form of interest and penalties.
Protection for your business
Before you engage with an umbrella company, you should do your homework to ensure that the agency is operating correctly and is fully compliant. Here are some steps you can take.
Firstly, here are some ‘red flags’ to look for:
- Is the umbrella company located offshore?
- Are there any financial incentives to engage with the umbrella company?
- Is the umbrella company allowing workers increased take-home pay?
In light of recent regulatory actions, clauses should be added to contracts with umbrella companies which can help protect you from illegally seeking assistance from umbrella companies running disguised renumeration schemes. Clients may want to consult with their legal advisers and consider the addition of:
- A clause with the requirements of evidence of PAYE returns filed & payments made to HMRC
- liabilities or damages arising from their failure to operate PAYE on the amounts received by the worker.
- a clause requiring your authorisation before further sub-contracting to a third party.
Additionally, it is recommended you ask for copies of payslips from the umbrella company you are working with each month. This validates those workers are being paid correctly by PAYE. Paying workers through umbrella companies can save you time and money, so naturally it's important to make sure everything is done correctly.
Further support & advice
HMRC recently launched a ‘Tax avoidance: don’t get caught out’ awareness campaign. The campaign is targeted at contractors who are employed through an agency or umbrella company and aims to tell them how to spot a tax avoidance scheme, the risks of taking up such schemes, and what to do when faced with one. This awareness campaign aims to make it as easy as possible to avoid getting involved in avoidance. It is recommended that you share this campaign with your workers to help educate them about the risks involved in tax avoidance.