UK: Crackdown on Umbrella Company Tax Avoidance: What Retail & Consumer Businesses Need to Know

In her first budget, Rachel Reeves announced significant reforms aimed at tackling tax avoidance. A key focus of these reforms is the regulation of umbrella companies. The new regulations, coming into effect in April 2026, are designed not only to protect workers, but also aim to save HMRC approximately £2.8 billion by curbing umbrella company non-compliance by 2030.

This decision follows a 2023 consultation on tackling tax avoidance in the umbrella sector in which HMRC estimated £500 million was lost between 2022 and 2023.

These reforms will invariably affect businesses in the retail and consumer sector, which relies heavily on temporary and contract workers. 

Below, we explore the key changes, their potential impact and the steps businesses will need to take to stay compliant.

Background

Umbrella companies have become a popular choice for contractors and temporary workers to manage payroll and tax obligations. These companies employ the workers, deduct PAYE and NICs, and pay the employer and employee national insurance contributions (NICs) to HMRC. This model was designed to offer flexibility and reduce the administrative burden for agencies and end clients.

However, the introduction of the 2007 “managed service company” rules and the 2021 IR35 reforms increased reliance on umbrella companies as a way of de-risking labour supply chains. This has led to a rise in disguised remuneration schemes and non-compliance across the umbrella company sector. 

An ongoing high-profile case highlighting these issues relates to “PPS”, an umbrella company which was found to have misled agencies by providing fake payslips and RTI returns, which falsely indicated that PAYE and NICs had been deducted. HMRC initially sought to recover the unpaid taxes from the company itself by presenting a winding-up petition for £7.3 million in unpaid NICs; however, this is now subject to appeal. HMRC may therefore resort to recovering the unpaid taxes from the individual employees who believed all their tax had been deducted at source, and therefore were not expecting any further liability. 

This case serves as a cautionary tale of the significant costs and risks that can arise from using umbrella companies.

What will change?

Recruitment agencies will be obliged to take responsibility for ensuring PAYE, Class 1 NICs and apprenticeship levy are correctly deducted and accounted for to HMRC. This will be the case even if they outsource payroll functions. 

If there is more than one UK agency in the chain, it is the agency that has the direct contractual relationship with the end client that will be responsible.

If there is no recruitment agency involved, the responsibility for handling PAYE compliance will sit with the end-user. 

This shift in responsibility will act as an incentive for businesses to re-evaluate labour supply chains and assess their use of umbrella companies.

Impact on Retail & Consumer Sector Businesses

For retail and consumer businesses, the new rules will have several important consequences for businesses:

Due Diligence

Due diligence involves thoroughly reviewing the use of umbrella companies in labour supply chains and assessing any associated compliance risks. A robust due diligence strategy will be essential for end-clients and recruitment agencies, particularly those that are part of more complex supply chains.

This due diligence exercise may include:

1. Confirming PAYE compliance and audit records: i.e. ensuring the umbrella company is registered with HMRC for PAYE purposes and verifying that it maintains clear, auditable payroll records, and payroll responsibilities are being correctly complied with, such as minimum wage, holiday pay and deductions for statutory entitlements. 
2. Assessing current employment agreements: businesses may wish to review umbrella company employment contracts to ensure ongoing compliance. 
3. Requesting compliance certifications: request evidence of accreditation with organisations such as the “FCSA” (Freelancer and Contractor Services Association) or “Professional Passport” to provide reassurance that the umbrella company is committed to best practice and compliance with UK tax legislation.
4. Verifying supply chain transparency: in more complex supply chains, businesses may want to verify third party or subcontractor compliance with PAYE obligations. This may be particularly important if an umbrella has subcontracted certain obligations to undisclosed third-party agencies.

Increased Labour Costs

It was also announced in the Budget that the main headline tax rise was the increase in employer NICs. From April 2025, employer contributions will rise from 13.8% to 15%, and the threshold at which such contributions are payable will fall from £9,100 to £5,000. 

These changes will raise the overall cost of engaging employees, including workers via umbrella companies, as most contracts require that end users bear such tax increases. 

Impact on remuneration

Workers employed via umbrella companies could see their take-home pay reduced as a result of higher employer NICs unless their assignment rates are adjusted. Retail businesses will need to consider whether they need to adjust pay structures to prevent worker dissatisfaction, or negative publicity.

What should businesses be doing now?

With the new rules on umbrella companies taking effect from April 2026, businesses should prepare now to ensure compliance and avoid potential liabilities.

• Review existing supply chains: to understand the potential impact of the new rules to help identify areas that need adjustment. This may also involve amending existing contracts with umbrella companies to include adequate rights and protections. 
• Update internal systems: if payroll has not been outsourced, business will need to ensure internal systems and processes are compliant with PAYE and take into account any extensions to compliance under the new legislation.
• Conduct due diligence: For businesses intending to remain with the umbrella company model, they should consider some of the recommendations outlined above. Businesses could think about implementing regular reviews of umbrella company usage more generally and assess whether this still reflects business needs. For example, it may be more appropriate to directly engage certain individuals on a fixed-term basis.
• Engage with government consultations: The government will release full details and draft legislation in the coming months, with stakeholder consultations to gather feedback. The government has also announced it will publish an online tool to help workers and agencies understand pay from umbrella companies. 

Next Steps

The clamp down on umbrella company tax avoidance could have significant implications for businesses in the retail and consumer sector. We can assist in your preparations for the change. 

Please speak to your usual Bird & Bird contact if you have any questions.