How shifting umbrella worker PAYE to agencies will hurt contractors

The umbrella contractor sector didn’t learn anything new from the chancellor being asked about improving umbrella company transparency including how to protect “workers” from excessive fees and improper arrangements.

My umbrella worker impact assessment has its origins in 2018

But it’s “workers” who I want to keep in mind, even if it means taking a trip back in time seven years ago, to assess what the April 2026 proposal to shift umbrella PAYE to recruitment agencies means for contractors, writes Lucy Smith, managing director of Clarity Umbrella.

Shifting umbrella PAYE to agencies; how did we get here?

Back in 2018, the Taylor Review suggested that there was something that needed to be done with the contractor industry. And yet there that well-intentioned recommendation sat for five years, while the IR35 legislation played ping pong with workers’ livelihoods, overshadowing any progress on bettering this economically vital part of the temporary workforce.

Not for the first time, the knock-on effect of one piece of legislation -- the off-payroll working rules -- led to a rise in ‘umbrella companies.’ These operators (not all of them were bonafide brollies) tried to cash in on the move to a more cautious employment model.

The 2021 call for evidence on umbrella companies was a starting pistol, of sorts

Next, in December 2021, a “call for evidence” by the government suggested that there was movement and heavy concentration on whether the Employment Agency Standards Inspectorate (EAS) would be able to manage any such type of market regulation. Or whether there would need to be changes to pull the umbrella company business model under the Agency Conduct Regulations.

And despite what already feels like a significant journey, this is actually where today’s never-ending story started!

Morals, standards, and then consensus

We saw significant detrimental press coverage about umbrella companies over holiday pay, and payments being withheld from workers, leading to questions of legal or moral obligations to workers by umbrella companies.

Implementing legislation, or even a ‘standard’ to which umbrella companies should adhere to, could stamp out these issues and ensure that all umbrella companies are operating to ensure workers are paid their monies owed. Or so was the gradually forming consensus.

Disturbing things a little, we also saw a rise in tax avoidance schemes masquerading as “umbrella companies” putting the industry into further disrepute, defrauding the government coffers, and putting umbrella workers at significant risk of fines and unpaid taxes.

The umbrella sector clean-up proposal of mandatory due diligence

Positively, stemming from this outright dodginess, was a proposal that, to try and prevent these issues, “mandatory” due diligence by any employment business engaging umbrellas should be undertaken. Refuse, and the recruiter would risk ‘debt transfer’ down the chain for unpaid taxes.

Slightly upending things, at Spring Statement 2025 the Labour government confirmed that they would move forward with another option to address umbrella companies, which, in officialdom’s words is:

“Deeming the employment business which supplies the worker to the end client to be the employer for tax purposes where the worker is employed by an umbrella company, moving the responsibility to operate Pay as You Earn (PAYE).”

While due diligence is still a thing (just not a legislative thing), it is this proposal that will now be introduced from April 2026.

However, the reputable umbrella company industry has hit back at the potential unintended consequences of the PAYE shift proposal, with concerns raised over the future of many compliant parties in the supply chain.

What COULD the April 2026 PAYE shift mean for umbrella contractors?

Above, I use the word “could” intentionally, as there are ideas being looked at which could see this proposal to shift umbrella workers’ PAYE amended. Or it could be delayed.

Before I get to why some form of amendment is probably necessary, let me be very clear because it’s not stated enough. The regulation of umbrella companies and the proposed PAYE shift are two separate things.

Indeed, umbrella regulation is still on the cards and has very few objectors, as putting the umbrella industry under the (ultimate) oversight of the Fair Work Agency, makes eminent sense.

How to avoid debt transfer legislation

However, the ideas being tabled to counter the PAYE shift proposal by HMRC centre on tax implications, and how the government could potentially recoup any unpaid employment costs (from the agency or end client) without the need for debt transfer legislation.

At present, it seems that HMRC does not have the powers to execute this latter outcome. Proposing ‘dual employment status’ would therefore make things a lot easier, but it will place tax liabilities on contractors’ recruiters or end-clients.

The 700,000 umbrella worker problem

Mishandled, the government’s proposal could mean handing the P45 treatment to around 700,000 umbrella workers -- overnight -- and changing their employer (away from the umbrella company and onto the recruiter or end client), purely for the purpose of creating the PAYE reference number under which the contractors are to be paid (by the agency or end-client).

However, the government wants the umbrella to work off the agency PAYE reference, but then keep the umbrella company as the employer for employment purposes.

Dual employment

So, my question -- and the question being asked by 10 other concerned parties – is; does this now potentially place the umbrella contractor with dual employment?

And here, I believe, is currently the biggest implication of the PAYE shift proposal.

Dual employment can lead to complications in tax codes.

It triggers confusion as to where any tax-free allowances sit. The use of BR (Basic Rate) 20% tax codes for employees who are 40% taxpayers inevitably leaves them with a tax bill at the end of the tax year. Or we can look forward to overpayment of taxes where a ‘D0 code’ (40% only) is used, leading to contractors having to then wait for refunds at the end of the year. What a mess.

A loss of rights is on the cards for umbrella contractors

But there’s more potential fallout for workers.

Contractual arrangements may be forced to be changed, whereby contractors previously under PAYE employment with the umbrella, may be forced into a Contract for Services. The effect? They’d have less rights than offered under an umbrella company, so as opposed to being an employee of the brolly, they now potentially attain agency worker status, thereby losing any employment rights!

A loss of continuous employment too

I also fear that any contractors with multiple assignments may be forced to have even more employers, as the recruiters are likely to restrict Preferred Supplier List (PSLs) even more, potentially leading to issues when it comes to mortgages and credit references.

Remember, working via an umbrella company gives continuous employment to contractors. However, HMRC’s PAYE shift proposal would mean chopping and changing, with no continuity for the contractor.

The other day I noticed a comment that recruiters aren’t aware of compliance as they ought to be, potentially forgetting it after day one until a year later.

Agencies underestimate umbrella understanding of employment rights rules and administration

Well, many recruiters aren’t also aware of the complexities of umbrella payroll.

Reputable umbrella companies have expertise around full employment rights, such as sick pay, maternity pay and holiday pay. Removing this training and understanding could open the doors to new non-compliance. And it could put HMRC’s envisioned process in jeopardy, with it not necessarily being managed properly and confusion as to which employer is managing what process in the chain.

The pension pinch

Workers won’t want the PAYE shift plan for financial reasons too.

In fact, many contractors have great flexibility when it comes to pensions; especially when engaging with umbrella companies offering salary sacrifice pension and SIPP contributions.

Moving to dual employment or agency PAYE may put pay to this attractive retirement savings option, with the ‘choice’ being to simply accept the employer’s pension scheme that is on offer.

Final thoughts (‘baby’ and ‘bath water’ come to mind)

Cracking down on a few rogue umbrella companies in the manner proposed by HMRC, is likely to have huge knock-on effect to everyone involved in the industry.

The positive note from this potentially serious misstep is that many industry groups and contractors have written to MPs, backed up by policy advisers. So we hope that HMRC, the Treasury and the government are listening.

By slightly adjusting the train of thought, allowing umbrellas to continue to provide the services they do already under their PAYE references, and instead making the liabilities joint and several, the government could head off potentially huge and adverse changes in the umbrella industry, at the same time as allowing today’s compliant umbrella companies to thrive in a way that all parties are familiar with.