The government has confirmed that changes to umbrella company regulation will come into force in 2027, following the publication of its response to the 2023 consultation on tackling non-compliance in umbrella companies earlier this year. Changes to PAYE responsibility will take effect before this, in April 2026, so employers with umbrella companies in their supply chain should start planning now.
Defining umbrella companies
One of the first proposals is to define umbrella companies within the law. The government has amended the Employment Rights Bill to define umbrella companies, based on two defining indicators:
- An entity which is in the business of employing a person with a view to them being supplied to a hirer.
- An entity which is in the business of paying for, receiving or forwarding payment for the services of a person with a view to them being supplied to a hirer.
The government hopes that the simplified definition will provide clarity when it comes to enforcement and compliance obligations, which were concerns raised during the consultation process. The new clause in the Bill paves the way for regulation of umbrella companies in a similar way to the regulation of employment businesses. The government plans to consult on changes to the regulations to facilitate this.
New regulatory oversight
The Employment Agency Standards Inspectorate (EAS) will be responsible for ensuring umbrella companies’ regulatory compliance. Under the Bill, the functions of the EAS will transition to the new Fair Work Agency.
PAYE responsibility
The government had previously announced that, from April 2026, where an umbrella company is used in a labour supply chain to engage a worker, the liability for Pay As You Earn (PAYE) deductions will move from the company to the recruitment agency that supplied the worker. If no agency is involved, the responsibility will lie with the end client. The government is seeking to prevent tax non-compliance and ensure umbrella companies account properly for workers’ payments. It also expected to reduce the risk that workers are faced with an unexpected tax bill.
Next steps
The proposed changes show that a more tough regulatory approach to umbrella companies is coming. The government hopes that the changes will strengthen worker protections and improve legal clarity. Employers using umbrella companies in their supply chain would benefit from reviewing their compliance processes ahead of April 2026 when the change to PAYE responsibility comes into effect.
