What is the government’s stance on umbrella companies?

With hundreds of thousands of workers using umbrella companies in the UK, and over 500 providers to choose from, what is the government’s stance on umbrella companies, and how is it seeking to ensure compliance within the sector?


A compliant umbrella company will ensure that all of its employees are paid via Pay As You Earn (PAYE) – the government’s tax system. Aside from the margin they charge for operating the umbrella company, all workers should pay the same amount of tax, regardless of the umbrella they use.

However, whilst legitimate and compliant umbrella companies ensure workers pay the correct tax and National Insurance Contributions, a number of non-compliant providers exist in the marketplace.

These companies have exploited the UK’s tax system by allowing workers to pay less than their fair share – sometimes against workers’ knowledge. As a result, the government has released several pieces of guidance to help contractors, freelancers, agency workers, and the entire supply chain understand how compliant umbrella companies work and what to look out for regarding unscrupulous providers. The government has also opened a one-of-a-kind umbrella company consultation, and they’re urging everyone in the supply chain to contribute.

Government guidance on umbrella companies is available online

The government has never actively endorsed umbrella companies or suggested that temporary workers use them for payroll purposes. However, in 2021, numerous pieces of online guidance were released on the official government’s website that explains how umbrella companies work and what the supply chain should do to remain compliant with HMRC’s rules and regulations. Below is a summary of the guidance that is currently available. It’s an excellent idea to read these – to better understand the sector and how compliant umbrella companies should operate.

Working through an umbrella company

Released in April 2021, ‘Working through an umbrella company’ is government guidance that provides an overview of umbrella companies and how they should operate. The guidance covers numerous vital topics, including how umbrellas work, the payment process, understanding the supply chain, holiday pay, key information documents, risks of tax avoidance, and more.

The guidance is beneficial for those new to umbrella companies and is well worth reading.

Check how to reduce your risk of using an umbrella company that operates a tax avoidance scheme

In October 2021, the government released some guidance aimed at recruitment agencies and end-hirers. Called ‘Check how to reduce your risk of using an umbrella company which operates a tax avoidance scheme’, it’s no surprise this provides information on tax avoidance. To be more specific, there is plenty of advice on tax avoidance, including the different types, associated risks, tale-tale signs, penalties, understanding the legal liabilities, and more.

The guidance also covers additional information that is extremely helpful, including how staffing agencies should engage temporary workers, payslips, and reporting tax avoidance schemes. If you represent a staffing agency or work for an organisation engaging directly with contractors and freelancers, it’s well worth a read.

Check if you are at risk of tax avoidance

Later in 2021 (November), more government guidance was released called ‘Check if you are at risk of tax avoidance’. This information was aimed at contractors and freelancers who have used umbrella companies previously or are considering using them in the future. Rather than a long piece of text, this guide provides the user with a short questionnaire about their payroll arrangement. If the person answering has used a compliant umbrella, the outcome will state that they’re unlikely to have avoided tax payments. However, if the user responds in a way that suggests they have avoided tax, they’ll be presented with a warning and further instructions.

This tax avoidance check isn’t the most thorough, with only eight questions. However, it’s a good starting point if you want to understand more about your payroll arrangement and whether or not you have been paying the correct tax and National Insurance Contributions.

Check your payslip if you work through an umbrella company

‘Check your payslip if you work through an umbrella company’ was also released in November 2021 and is perhaps the most technical information the government’ has released on umbrella companies so far. The guidance provides you with a thorough overview of umbrella company payslips and all deductions. It is a great tool to check if the umbrella company payslips you have been given from your current and previous umbrellas follow the necessary rules and tax procedures (PAYE).

As well as providing the reader with helpful information about payslips, it also covers other topics, including the risks of using disguised remuneration schemes, understanding your responsibilities as a temporary worker, how to report non-compliant umbrella companies, and more.

The government has recently opened a consultation to gather vital information on umbrella companies

Towards the end of 2021, the government opened a call for evidence into the umbrella company marketplace. Described as a “fact-finding mission” by the FCSA (Freelancer and Contractor Services Association), the consultation looks to gather feedback and information from the entire umbrella company supply chain – including temporary workers, recruitment agencies, end-hirers and umbrella company staff.

The consultation is almost certainly a step towards the government regulating the industry. It provides everyone associated with umbrella companies the opportunity to share their experiences and opinions – whether positive or negative.

Crawford Temple, CEO at Professional Passport, has urged contractors to “share and air their views on umbrella working with the government so that a fair system can be put in place”.

If you have any experience working with umbrella companies, whether as a contractor or within the supply chain, you can contribute towards the government’s consultation, which closes in February 2022. For more information, please visit the government’s website.

Contributing is easy, and in the official PDF document supporting the consultation, a series of questions are pre-defined for specific supply chain members. You are required to answer the questions honestly and return your comments to the government (instruction on the government’s website).


The government does not actively endorse umbrella companies. However, they also have not outlawed umbrella companies either – unsurprising, given the number of workers using their services.

By introducing multiple pieces of online guidance, it appears the government is keen to steer temporary workers in the direction of compliant umbrella companies and providers that process payroll with PAYE. The original guide, ‘Working through an umbrella company’, also specifies the processes involved with umbrella payroll and is very helpful for first-time umbrella company users or those unsure how umbrellas operate.

The umbrella company consultation is a good way for both the government to understand better how umbrella companies operate in the UK and for the supply chain to contribute with experiences to ensure compliance standards are met moving forward. If you have ever used an umbrella company or are part of the supply chain, please do not hesitate to participate in the consultation because the more information the government has about umbrella companies, the better.

When the consultation reaches its conclusion, the government will undoubtedly give it a thorough review and look to improve the marketplace soon. It is in the government’s best interest to protect temporary workers and ensure they pay the correct tax and National Insurance Contributions (NICs). It’s also in the government’s best interest to deter non-compliant umbrella companies and payroll providers from entering the UK marketplace. Unscrupulous providers fuel greed within the sector and cost the government millions in unpaid tax and NICs. Anything the government can do to eliminate unethical payroll companies and encourage contractors and freelancers to use companies operating PAYE is in its best interests.

With the above in mind, it seems unlikely that the consultation will mark the death of umbrella companies. Instead, it’s expected that regulations will be introduced to further police the sector and to promote compliance.

As soon as more information comes to light, we’ll provide an update.

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Last updated: 1st June 2022