Article Contents
From April 2026, new legislation will change who is responsible for accounting for PAYE when a worker is employed by an umbrella company. Previously, umbrella companies were responsible for accounting for PAYE. However, now the responsibility falls on either recruitment agencies who supply contractors to end clients (or end clients, should they recruit contractors themselves) when there is an umbrella company involved in the supply chain. Therefore, it is really important for agencies to ensure that the umbrella company is compliant with HMRC regulations, and the correct deductions and payments of income tax and National Insurance Contributions are made to HMRC, as the agency is liable for any shortfall.
Watch Our Video
Article Contents
- Related Articles
- Helpful Guides
What Do Recruitment Agencies Need To Do?
Recruitment agencies need to conduct thorough due diligence when selecting umbrella companies to ensure compliance with tax and National Insurance obligations. This process can be broken down into three key steps.
1. Verify Compliance and Deduction Accuracy: Check that the umbrella company is compliant with all relevant regulations and check that tax and National Insurance deductions are accurate and align with HMRC regulations.
2. Scrutinise Holiday Pay Arrangements. Check how holiday pay is deducted, and whether it is accrued or advanced back to the contractor. You can see our blog on compliant holiday pay here.
3. Ongoing Monitoring of Compliance. Recruitment agencies will need to regularly review the umbrella company’s compliance by checking contractor’s reconciliation sheet and payslip deductions. If there are any compliance breaches, then they need to be addressed and reported promptly.
Taking these proactive steps should help ensure that both agencies and the contractors are protected from non-compliant umbrella companies, and potential legal and financial issues, such as unexpected high bills and penalties.
What Will Happen if Agencies Don't Meet Their Obligations?
If a recruitment agency fails to meet these obligations, it will be liable for any shortfall, even if the contractor’s payroll is outsourced to an umbrella company. Non-compliance can lead to serious repercussions, including financial penalties, legal action, and reputational damage. Agencies may also be held accountable for unpaid taxes and National Insurance Contributions, resulting in unexpected high bills from HMRC. Therefore, it is essential for agencies to comply with the new legislation and conduct due diligence on the umbrella companies to which their contractors outsource payroll.
It’s estimated that by shifting this obligation to agencies, £2.8 billion will be protected from being lost to non-compliant umbrella company operations over the period up to the 2029-2030 tax year.
5 Fastest Ways To Identify a Non-Compliant Umbrella Company
Here are the 5 quickest ways to spot if an umbrella company is non-compliant.
1. Unclear Deductions or Complex Payslips. A contractor’s payslip and reconciliation sheet should show all deductions made clearly. Umbrella companies which aren’t clear about how or why they make deductions could be managing a contractor’s payroll non-compliantly. Furthermore, if a payslip seems overly complex, or the umbrella company have an overly complex pay scheme, then this is a sign of non-compliance.
2. Too Good To Be True Take-Home Pay. If take-home pay seems too good to be true, then this will be the case. Every employee should be paying the correct amount of tax and National Insurance Contributions. Extremely high take-home pay calculations are a key indicator of non-compliance.
3. Unusually Low or NO Fees. Usually, there should be weekly or monthly administration fees which will be deducted from a contractors pay. If an umbrella company is advertising zero or extremely low fees, then this might indicate a non-compliant approach to tax and other deductions.
4. Tax Avoidance Language or Schemes. Tax avoidance language such as ‘loan scheme’, ‘minimising tax’, or ‘tax-efficient structure’, all suggest that an umbrella company might be using tax avoidance schemes. Legitimate umbrella companies don’t use this language or manage their payroll via tax avoidance schemes. Their deductions are compliant and transparent, and their language and approach will reflect this.
5. Lack of Accreditations. Umbrella companies without proper accreditations are a red-flag for non-compliance in the UK. So, always check if the umbrella company is accredited by the FCSA or similar accreditation bodies. In addition to this, any previous reports of non-compliance will tell you if an umbrella company has previously operated outside of compliance. If it is the case that you find previous reports of non-compliance against an umbrella company, then it’s best to avoid it. Reliable sites to look up non-compliant umbrella companies include:
Compliant Umbrella Company | Non-Compliant Umbrella Company |
Clear and transparent deductions (including National Insurance & Tax) | Unclear / complex deductions or pay schemes. |
Reasonable take-home pay. Contractors should receive an initial take-home pay illustration before signing anything, showing a clear breakdown of deductions in line with HMRC regulations and UK legislation. | Unusually high take-home pay. If your take-home pay is unusually high, it’s likely due to tax avoidance schemes, such as loans or offshore structures. |
Administrative fees are paid out weekly or monthly and are clearly explained. | Advertises unusually low or no fees. |
Demonstrates compliance with HMRC regulations and UK legislation. | Promotes tax avoidance schemes or uses tax avoidance language, such as ‘loan scheme’, ‘minimising tax’, or ‘tax-efficient structure’. |
Accredited by reputable bodies such as the FCSA. | Lacks any reputable accreditations. |
Clearly explains whether holiday pay is accrued or included in your rate, and details how it is paid out in your contract and pay slips. | Lack of transparency on holiday pay, or no clear indication of how it is paid out. |
The umbrella company has good reviews and a strong reputation. | The umbrella company has negative reviews, a bad reputation, or has been reported for non-compliance to authorities like the FCSA. |
Has a registered UK address. | Has an unregistered or offshore address. |
Provides clear guidance on IR35 status. | Does not provide clear guidance on IR35 status. |
How Will My Payslip Be Affected As A Contractor?
From April 2025, there will be an increase in Employers National Insurance and a reduction in the Employer’s National Insurance threshold. So as a result, you will see an increase in Employer’s National Insurance by 1.2%, bring the rate up to 15%. The new threshold for this is £5,000, meaning Employer’s National Insurance will apply to earnings above this amount.
Additionally, from April 2025, the minimum wage for those aged 18-20 will increase to £10 per hour and those aged 21 and over will increase by 6.7% to £12.21 per hour. If you earn minimum wage, this change will raise your income.
For a new breakdown of your pay, please get in touch with your Danbro Umbrella Account Manager.
What Happens if the End Client Directly Hires a Contractor Whose Payroll is Outsourced by an Umbrella Company?
In this case, the liability falls to the end-client. Therefore, if you are an end-client who hires a contractor whose payroll is outsourced to an umbrella company, then you must carry out due-diligence to ensure that the umbrella company’s PAYE system is compliant.
Danbro Umbrella: Accredited and Compliant with HMRC Regulations
Danbro Umbrella are FCSA, IIP and ISO 9001 accredited, so you can be sure that we are compliant with all relevant regulations. In line with HMRC rules and UK tax legislation, we offer full statutory employment rights, including holiday pay, detailed breakdowns of deductions on contractor reconciliation sheets and payslips, and weekly payments to our contractors. As well as this, we can offer your contractors employee discount rewards and much more!
We have been doing this for 25 years, with a high reputation for compliance and will be able to guide you through these government changes to make sure you are safe and compliant.
If you have any further questions or need further guidance on the legislation changes, then get in touch with your Danbro Account Manager. Alternatively, get in touch via our contact button below.
