Working with Umbrella Companies

Umbrella companies are businesses that employ temporary workers on behalf of recruitment agencies. If you're considering using umbrella companies to engage workers, or thinking about working through one yourself, it's important to understand how they operate, who's responsible for what, and what new regulations are coming in from April 2026.

What is an umbrella company?

An umbrella company acts as an employer for temporary workers found by recruitment agencies. The umbrella company doesn't find work for people — that's the recruitment agency's job. Instead, it handles the employment side: paying wages, operating PAYE (Pay As You Earn), and managing tax and National Insurance deductions.

Here's how the typical arrangement works:

• A client business needs temporary workers
• A recruitment agency finds suitable candidates
• The umbrella company employs those workers
• Workers carry out assignments for the client
• The umbrella company pays the workers' wages

The worker becomes an employee of the umbrella company, not the recruitment agency or the client they're actually working for.

How umbrella companies fit into the supply chain

When a recruitment agency finds you temporary work, they may ask you to be employed through an umbrella company. The agency sets up a contract with the umbrella company, which agrees to employ you and pay your wages.

The agency pays the umbrella company an "assignment rate" (sometimes called an uplifted rate, umbrella rate, day rate, or hourly rate). This is not the same as your actual pay — the umbrella company deducts its operating costs and various statutory payments before calculating your gross pay.

The umbrella company then employs you under a proper employment contract and must give you all the rights that come with being an employee.

Employment rights when working through an umbrella company

As an umbrella company employee, you have the same employment rights as other employees. This includes:

• A written employment contract
• At least the National Minimum Wage or National Living Wage, paid on time and in full
• Automatic enrolment into a workplace pension scheme (if eligible)
• Paid holiday entitlement

Your umbrella company must handle holiday pay in one of two ways. They may pay "rolled up holiday pay" — an additional amount included in every payslip to cover holidays. Alternatively, they may calculate your holiday pay using a 52-week reference period and pay it when you actually take leave.

The umbrella company must also carry out right to work checks before engaging you, provide you with payslips, and make sure you understand your statutory rights.

Understanding your pay

The assignment rate advertised for a role is what the recruitment agency pays the umbrella company — not what you'll receive. Before you get your gross pay, the umbrella company makes several deductions:

• Umbrella company operating costs (their margin)
• Employer National Insurance contributions
• Employer workplace pension contributions
• Holiday pay (if not paid separately)
• Apprenticeship Levy (if applicable)

What remains is your gross pay. From this, the umbrella company then deducts:

• Income Tax
• Employee National Insurance contributions
• Employee workplace pension contributions
• Student loan repayments (if applicable)
• Any other deductions you've agreed to or are legally required to pay

The final amount is your net pay or take-home pay.

You should receive both a payslip showing your pay and deductions, and often a reconciliation statement (pay statement) showing how your gross pay was worked out from the assignment rate. If you don't understand the deductions or don't receive this breakdown, contact your umbrella company.

HMRC provides a tool to help you work out what your pay should be from an umbrella company, which can be useful when comparing job offers or checking your payslip is correct.

Responsibilities for recruitment agencies

If you're a recruitment agency working with umbrella companies, you have specific legal obligations:

Providing information to workers: You must give workers a key information document when they first register with you. This must include the name of the umbrella company, the minimum assignment rate, what will be deducted, and the worker's minimum gross pay. You must update and reissue this document when there are significant changes.

It's always your responsibility to issue key information documents — you cannot pass this to the umbrella company.

Being clear about pay rates: When advertising jobs or discussing roles, be clear that the assignment rate is what you'll pay the umbrella company, not what the worker will receive. The worker's gross pay will be less than the assignment rate.

Other legal requirements: You must submit quarterly employment intermediaries returns for workers placed with end clients where you don't operate PAYE. You must also follow VAT self-billing requirements, prevent illegal working by checking umbrella companies carry out right to work checks, and comply with various employment regulations including the Employment Agencies Act 1973 and Agency Workers Regulations 2010.

Working with compliant umbrella companies

Many umbrella companies follow the rules, but some don't. Non-compliant umbrella companies may not pay all money owed to workers or to HMRC, may engage in tax avoidance schemes, or may operate mini umbrella company fraud.

If you're a recruitment agency involved in non-compliant supply chains and don't take reasonable measures to avoid this, there can be serious consequences. Claiming you weren't aware of non-compliance is not usually a defence. HMRC may prosecute you for failing to prevent criminal facilitation of tax evasion, deny your right to recover VAT input tax, or issue enablers penalties.

Good umbrella companies should:

• Be run by fit and proper people who are easily identifiable on Companies House
• Be financially viable and able to make payroll even if not paid by the agency
• Provide clear, honest information about margins and charges
• Treat all contractual income as taxable earnings subject to PAYE
• Pay at least National Minimum Wage or National Living Wage
• Compete based on lawful practices, not tax avoidance schemes
• Have proper starter and leaver processes in place

Changes coming from 6 April 2026

From 6 April 2026, significant changes to PAYE responsibilities will come into effect for labour supply chains that include umbrella companies.

If you're an agency or end client, these new rules mean you'll be responsible for making sure PAYE is operated correctly when an umbrella company employs your workers. If HMRC finds an umbrella company hasn't paid the correct amount of PAYE, they may recover it from you instead.

The government is also working to include umbrella companies in the legal definition of an employment business through the Employment Rights Bill, which will bring them under regulatory oversight.

What workers should know

If a recruitment agency asks you to work through an umbrella company, make sure you understand:

• How the employment arrangement works
• What other options might be available to you
• Exactly what you'll be paid after all deductions

Check your payslip and reconciliation statement carefully each time you're paid. If deductions seem wrong or aren't properly explained, speak to your umbrella company immediately.

You can use HMRC's online tool to estimate what your gross and net pay should be, which is particularly useful when deciding whether to accept a role or checking your pay is correct.

Remember that some umbrella companies operate tax avoidance schemes. If an arrangement seems too good to be true — for example, if you're promised you'll pay much less tax than expected — it probably is. You could end up with a large tax bill later.

Sources

• Examples of good practice for umbrella companies in the temporary labour market
• Responsibilities for employment businesses working with umbrella companies
• Working through an umbrella company
• Work out pay from an umbrella company

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.