Umbrella companies and agency PSLs – how do they work?

preferred supplier list PSL umbrella

If you’ve found a contract through a recruitment agency, you’ll often be encouraged to use an umbrella company on the agency’s preferred supplier list (PSL).

This guide explains how umbrella companies work, the role of PSLs, why agencies might favour certain providers, and how to ensure you’re getting the best deal rather than just funding an agency’s commission scheme.

What is an umbrella company?

An umbrella acts as an intermediary between workers and clients. Instead of being paid by the agency or client, the agency pays the umbrella, which then processes payroll after taking deductions from your assignment rate:

To find out more, read how a PAYE umbrella works and how your net take home pay is calculated (including all the deductions).

As an umbrella employee, you will receive regular pay (weekly or monthly), a payslip, and various statutory benefits.

What is a Preferred Supplier List (PSL)?

A Preferred Supplier List (PSL) is a list of pre-approved umbrella companies recommended by a recruitment agency to its contractors. In some cases, you have to choose one from the list.

Agencies use PSLs for several reasons:

  • To make sure any umbrella companies comply with HMRC rules to avoid potential tax issues.
  • To standardise and admin processes to make payroll smoother (it’s easier with a small select group of umbrellas).
  • To benefit from financial incentives such as commissions, rebates, or kickbacks from umbrella companies.

What role does the FCSA play in PSLs?

One of the criteria for adding an umbrella to an agency’s PSL is FCSA accreditation.

The Freelancer & Contractor Services Association (FCSA) is an industry body that sets compliance standards for umbrella companies. The FCSA audits most leading umbrella companies annually for tax compliance and to ensure deductions are made correctly from contractors’ pay. You can search the FCSA database to see if an umbrella is accredited or not.

PSL umbrella companies – the pros and cons

If you have a choice in the matter, here are some pros and cons of using a PSL umbrella

Pros

  • There is a high likelihood of compliance, as PSL-approved umbrellas should be vetted to make sure they comply with HMRC tax rules and any statutory regulations.
  • Reliable payroll, since pre-approved companies have a track record of paying correctly and on time
  • Less administrative work, as the agency and umbrella company already have a working relationship

Cons

  • Limited choice, as contractors may have to pick from a shortlist rather than choosing their own provider
  • Potentially higher fees, since PSL-listed umbrella companies might charge more to compensate for agency commissions
  • Conflict of interest, as the agency’s recommendation may be financially motivated rather than based on what is best for the contractor

Kickbacks – the not so good part of PSLs

One of the biggest issues with PSLs is that recruitment agencies often receive financial incentives to recommend certain umbrella companies. These inducements come in different forms:

  • Referral fees, where the umbrella company pays the agency a set amount per contractor signed up
  • Rebates, where the agency gets a fixed fee for every weekly or monthly timesheet processed.
  • Bonuses for agency staff, where recruiters receive rewards for referring contractors to PSL-listed umbrella companies

This creates a potential conflict of interest, where the agency’s recommendation might be driven more by financial gain than by the contractor’s best interests.

In theory, you can ask your recruiter what financial inducements are made by recommending a particular umbrella, but in reality – the agencies hold power in this relationship.

If you have a particular umbrella you’d like to use – assuming it is completely compliant – you may be able to use it, otherwise you may need to choose a PSL umbrella if you want the role.

Umbrellas face more scrutiny from April 2026

According to Autumn Budget 2024 chapter 5.26, recruitment companies will become liable for the correct application of PAYE where their workers operate through an umbrella company from April 5th, 2026.

To tackle the significant levels of tax avoidance and fraud in the umbrella company market, the government will make recruitment agencies responsible for accounting for PAYE on payments made to workers that are supplied via umbrella companies.

Although the fine print has yet to be published, this change is likely to increase recruiters’ use of PSLs.

Recruiters may become responsible should an umbrella they recommend be found to be non-compliant, leading to a debt transfer from the umbrella to the recruiter.

The proposed changes could also see more HMRC scrutiny over expense claims processed by umbrellas.

Again, if any claims are found to be unscrupulous, the liability could be transferred to the agency.

Final thoughts when using a PSL umbrella

  • Be aware that you may not have a choice in the matter (in reality).
  • Make your own checks to ensure your choice of umbrella is compliant, whether it’s on the PSL or not.
  • Read our guide on how to compare umbrella companies before signing up.
  • Stay aware of upcoming regulatory changes that could impact umbrella companies.

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