The umbrella sector is currently unregulated.  That may seem surprising to many given how much money passes though the hands of hundreds of umbrella companies every year.  It’s said that around 700,000 people work though umbrella companies and assuming they all earn the average UK salary of around £36,000 then that’s a minimum of £25billion being processed by umbrella companies every year!

Clearly with that much money splashing around, there’s going to be temptation for bad actors to look at ways they can cream some off the top.  You only have to look at HMRC’s list of tax avoidance promotors to see that where there are opportunities to make some extra money then there’s a ready supply of people who take those opportunities: HMRC Named and Shamed List

Let’s look at an example.  A contractor earning £50,000 searches online for an umbrella company.  They use a well known search engine and the top result is for an umbrella company “broker” promising them the best take-home pay rate.   This is a typical scenario and thousands of contractors use these sites every year.  What they don’t know in the main is that these broker sites are owned by large businesses, based outside of UK tax jurisdiction which in turn own multiple “umbrella companies” operating in the UK.  These umbrellas generally operate a double payment model where tax and NI is paid on the National Minimum wage element of the contract value (say around £3100) but there is no tax paid on the remainder.  The umbrella promises a rate of return of 75% of the contract value which is £42,500 meaning that there is £12,500 left after payment is made to the contractor – take out the £3,100 paid to HMRC and that leaves £9,400 profit for the umbrella.

Given that umbrella companies have been around for around 25 years, that’s a huge amount of money that has funded a few superyachts.

Finally though, things are changing and they are changing in a number of ways.

Regulation

In Summer 2021, the then Conservative Government launched it’s first consultation on the role of umbrella companies in the labour market.  In 2023 there came the Governtment’s consultation on Tackling Non-Compliance in the Umbrella and in March this year, the responses were published.  Legislation will be introduced in April 2026 and draft legislation should be released in the Summer.  We know some of the headlines:

The Employment Rights Bill will be amended to bring umbrella companies within the definition of Employment Businesses and under the scope of the new Fair Work Agency.

Umbrella companies will be regulated in a similar way to the existing Conduct Regulations

From April 2026, where there is an umbrella company in the supply chain, the responsibility to account for PAYE will rest with the recruitment agency that supplies the worker to the end client.

This represents a major change to how umbrellas will engage with their agency partners and the detail of how things will work in practice should become clearer when we get sight of the draft legislation later this year.

In the meantime though, it is clear that Government still see umbrellas as playing a valuable role in the temporary work sector, after all there’s unlikely to be an appetite from HMRC to have to monitor 40,000 recruitment agencies rather than around 600 umbrella providers.  They have issued guidelines on best practice for umbrella providers which has generally been well received.

So in this new world of umbrella compliance, how can agencies ensure that they meet their new responsibilities?  How can they be confident that PAYE has been correctly accounted for an paid by the umbrella provider?

Accreditation and Certification

In the past, in the absence of any form of regulation, the umbrella sector has effectively been self-policed.  Accreditation bodies such as the FCSA (Freelancer and Contractor Services Association) and Professional Passport have been the “gold standard”.

Both of these bodies carry out an annual review of the umbrella companies that form their membership.  These reviews are detailed and comprehensive, but the one thing they don’t do is check ongoing, actual live payroll data – they rely on information provided by the umbrella companies on a particular day.

This is where technology is starting to make waves in the sector. Veripaye and Saferec are the new players (albeit Veripaye is run by the FCSA), both of which use AI to audit payslips “on the fly”.  These real-time checks, use API links to the umbrella companies’ back office systems to ensure that tax and NI is correctly accounted for, and also ensure that other things like holiday pay, Statutory Payments and levies are also treated correctly.  In addition, the umbrella companies’ RTI returns are checked against the data regularly.

At the moment these are the only providers who provide this kind of reassurance to agencies but there will no doubt be more appearing as we get closer to the legislative changes in April 2026.

Kanopi Contract Services has chosen to engage with the FCSA to provide real time auditing of all of its PAYE umbrella payments via their Veripaye process.  In addition, we have also partnered with Diligence Hub, which is a secure portal to enable umbrella companies to provide their due diligence information to other parties in the supply chain.

To find out more about accreditations, give us a call on 01524 952777 or Click here