Good practice umbrella companies

Agencies, Agents, Budget, Contractors, Deductions, Education, Employment Law, Equality, Taxation, Uncategorized 7 Minutes

Actions to take as an umbrella company to support compliance and best practice in the temporary labour market.

Prior evidence has indicated that around 70% of umbrella organisations may have been involved in either promoting or operating tax avoidance schemes, some to public sector workforces in Health and Local Government.

HM Revenue and Customs (HMRC) have published on 8 th April 2026 guidance on good umbrella practice in the temporary labour market.

This new guidance for umbrella companies: 

  • sets out practical examples of how to demonstrate good practice — it is not a list of everything they are legally obliged to do
  • addresses concerns that businesses, legal experts and others have consistently reported to the government about the conduct of umbrella companies

This published guidance does not create any new legal obligations for umbrella companies.

Workers, recruitment agency or others in the supply chain may use these examples to help choose which umbrella companies to engage with. 

The government recently announced in the policy paper ‘Tackling tax non-compliance: umbrella company market’that from April 2026, it will make agencies responsible for accounting for PAYE when providing workers employed through umbrella companies.

The government is also taking action through the Employment Rights Bill to bring umbrella companies within scope of the legal definition of an employment business to allow for their future regulation.

HMRC will keep the guidance under review to ensure that any necessary changes are reflected when needed

Operating responsibly 

An umbrella company must follow relevant company, tax and employment law. It should apply them in a way that is consistent with the aims of those laws. It is the umbrella organisations responsibility to identify and comply with legal obligations.

Umbrella companies should be run by fit and proper people

They should set up and manage the business diligently and understand responsibilities.

Actions to take include:

  • making it easy to identify and contact individuals named on Companies House who own and run the company — such as the directors, company secretary or those with significant control
  • being suitably informed to run the umbrella company — such as having an understanding of the UK temporary labour supply market and its associated legal requirements
  • having a stable company with no frequent change in officers, directors, or partners — including no history of repeated insolvency of the same type of business or intention to do so to avoid any legal obligations

Umbrella companies should be financially viable 

They should be able to meet ongoing financial commitments. Actions to take include:

  • making sure they you can make the next payroll on an ongoing basis, even if you are not paid by the recruitment agency or end client
  • demonstrating appropriate and adequate levels of insurance as an employer of staff

Umbrella companies must follow the statutory requirements that apply to all employers 

Actions to take include:

  • undertaking right to work checks on employees before engaging them under a contract
  • providing employees with payslips and a contract of employment, and making sure that they have confirmed that they accept their contract of employment
  • making sure employees explicitly know their statutory rights associated with their employment
  • setting out your employees’ entitlements in their contract of employment
  • staying up to date with any changes to relevant employment, tax, and company law

For more information on some of the statutory rights that apply to your employees, check the:

Umbrella companies must accurately operate payroll 

They must accurately calculate deductions from the employees’ pay and pay them what they are entitled, without delay or any contrived arrangement to hide non-compliance.

Actions they can take include:

  • using payroll software that calculates pay, tax liabilities and any levy such as the apprenticeship levy accurately
  • paying employees all their entitlements as contractually agreed and legally required — such as paying workers at the frequency set out in their contracts
  • paying employees at least National Minimum or National Living Wage
  • making the correct pension, student loan and other statutory deductions from employees’ pay and remitting them to the employees’ pension, student loan and other accounts in good time or by the deadline
  • deducting amounts for additional products or services:
    • only where your employee agrees they want them
    • from pay after tax and applying the appropriate VAT treatment
  • paying into your employee’s bank account their net pay amount stated on their payslip, and the payment should be made by you (the umbrella company) and not a third party
  • having starter and leaver processes in place and promptly administered, even with high turnovers of staff, such as putting employees on the correct tax code and paying holiday pay

Umbrella companies should compete based on lawful practices 

They should operate compliant business models to attract employees and business.

Actions include:

Providing a good service 

Employees and recruitment agencies should understand what to expect. They should provide them with good levels of support and engagement.

Umbrella companies should be clear, open and honest in the information they provide their employees

They should provide employees with all necessary information in a way that they can understand.

Actions to take include:

  • being transparent with employees about the umbrella margin, including being clear where a small margin is part of an inducement that will increase later and where there may be additional charges for items like copies of payslips
  • explaining rates of pay to distinguish between the income as the umbrella company and the employer deductions, and your employees’ pay
  • providing employees with a reconciliation statement (sometimes known as a pay statement) to show how they have arrived at their gross pay and net pay from the assignment rate received from the recruitment agency
  • publishing example annotated payslips and reconciliation statements on your website to help your employees understand deductions made from rates of pay
  • clearly providing your employer (PAYE) reference number and the employee tax code and year to date figures, as well as rolled up holiday pay (where applicable) separated out from gross pay on payslips
  • giving employees a copy of their agreed employment contract, and passing on assignment information from recruitment agencies as new assignments arise, for their records
  • itemising in the contract how your umbrella company structures pay, for example basic pay and discretionary bonus
  • making sure your employees understand who employs them, including in circumstances where their employment moves to another entity that they did not ask for
  • telling your employees to check their personal tax, pension, and student loan accounts so they can verify that you are paying in their contributions correctly and promptly
  • making sure references on your website to any accreditations your business may hold are up to date and can be verified
  • advising your employees to check government guidance on working through an umbrella company
  • encouraging your employees to work out pay from an umbrella company so that they understand their take-home pay and make sure their tax payments are correct

Umbrella companies should provide employee care

They should tell employees that they are their employer and that the recruitment agency or end client is not. This will mean they will know who to come to for support.

Actions you can take include:

  • making reasonable adjustments for employees and supporting those who need extra help, such as employees whose first language is not English
  • providing employees with internal policies — such as an employee handbook, with information on where to go to raise issues or grievances, for example in relation to pay, and the processes in place to address them
  • making sure current and former employees have access to payslips

They should have processes in place to support the recruitment agencies or end clients you work with, so that they can properly fulfil their own legal obligations and undertake due diligence on your business.

Actions you can take include:

  • publishing the Companies House number on their website for others in the supply chain to check credentials
  • providing evidence showing that you are a well-run company, including publishing verifiable compliance information, for example relating to the actions set out in this guidance
  • keeping up to date records, such as of accurate deductions being remitted in a timely manner
  • explaining contractual relationships and changes in your supply chain, such as subcontracting or moving an employee to another umbrella company
  • giving recruitment agencies what they need to meet their responsibilities, such as completing and maintaining Key information documents (KIDs) and providing them to candidates before their engagement as your employees, and on authorisations that may be needed for roles such as right to work checks
  • co-ordinating with recruitment agencies and employees so that processes run smoothly, such as getting signed timesheets from employees
  • reporting information in a way that allows recruitment agencies to fulfil their legal obligations such as the Conduct Regulations 2003 and Agency Worker Regulations

PAYadvice.UK 9/4/2025

Published by psimonparsons

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