Following the conclusion of the “tackling non-compliance in the umbrella company market” consultation and policy paper in October 2024, the sector is waiting for draft legislation. There are rumours circulating that we can expect this in summer 2025, which will come into effect from April 2026. Although there remains uncertainty as to what measures the final legislation will include, what is clear is that the responsibility for Pay As You Earn (‘PAYE’) and National Insurance (‘NI’) liability will move to the agency closest to the client in the supply chain, or where there is no agency, the client directly.
The overall aim of this new legislation is clear: to raise tax revenue by clamping down on non-compliant umbrella companies, to protect workers from exploitation and to ensure that tax liabilities are properly met. But what does this mean in terms of financial risk for recruitment businesses? Let’s dive into the details.
The importance of using a compliant umbrella company
With new regulation on the horizon, it’s important now more than ever to choose a compliant umbrella company. Not only do they operate transparently, they’ll correctly handle PAYE taxes, and ensure workers receive the benefits they’re entitled to under UK employment law; such as holiday pay, sick pay, and pension contributions.
By using a compliant umbrella company, recruitment businesses can reduce their exposure to:
- Legal risks – since the umbrella company is the employer, they take on all the associated employer responsibilities and risks, something that will become more complex following the introduction of the Employment Rights Bill which includes 28 news reforms. Even without the biggest shake-up of employment rights in a generation, claim exposure takes time, resource and cost to manage. A compliant umbrella company is already well placed to handle potential claims, grievances and disciplinaries, something that is likely to trend upwards in an increasingly litigious world.
- Financial risks – calculating payroll for the temporary workforce is complicated and from April 2026, the financial risk of getting it wrong can quickly run into the hundreds of thousands. Ongoing support from a compliant umbrella company will be invaluable to protect your business. Larger, financially stable umbrella companies will also provide tax indemnities as an extra layer of reassurance that, in the unlikely event of an error, the recruitment business will be covered for any potential financial loss.
- Increasing overheads – running complex payroll calculations is no easy feat and may prove impracticable and challenging to administer. The recruitment business would need to factor in tax codes, NI categories, student loan notifications, court orders, etc. And that’s not to mention managing salary sacrifice and pension contributions and communications if they wanted to match the same level of benefits provided by the umbrella company.
Financial risk can quickly escalate
Under the new regime the financial impact of using a non-compliant umbrella company can escalate rapidly. To illustrate the potential scale of the risk, consider a recruitment business that uses an umbrella company for 100 contractors, each working on an average umbrella company rate. This could create a tax and NI liability of around £400,000 per month. Over the course of a year, that amounts to a staggering £4.8 million in potential tax liabilities. And for 1000 contractors – that’s almost £50 million each year.
This doesn’t take into account any fines, penalties or interest which may be imposed by the tax authorities for non-compliance. As you can see, the financial implications for businesses using non-compliant umbrella companies are enormous. Not only could they face significant tax liabilities, but they may also experience damage to their reputation and a loss of clients, which could take years to repair.
Don't delay, start preparing now
As the UK prepares for the April 2026 deadline, it’s clear that the risks associated with non-compliance are significant and growing. Therefore, why wait, start preparing now. We have already provided a ‘next steps’ guide for agencies with some recommendations that can be actioned now, including:
You can find a more in-depth analysis of our recommendations here: https://www.paystream.co.uk/blog/agency-info/umbrella-regulation-the-future-of-the-umbrella-company-landscape/
With proper planning, robust due diligence processes, and having confidence in your supply chain, you can mitigate these risks and continue to operate confidently in the evolving contractor landscape.
At PayStream, we’re here to make this process as easy as possible for you. If you have any questions or need a helping hand, don’t hesitate to reach out to your Key Account Directors.
