An umbrella company employs temporary workers on behalf of a recruitment agency or an end client and pays them through PAYE. In the UK, it is a common way to engage contractors on short-term or fixed-term assignments.
The umbrella company does not find the work. The agency finds the assignment, the worker does the work for the agency’s client, and the umbrella company is the legal employer that runs payroll. It deducts Income Tax, employee and employer National Insurance contributions, pension contributions and any student loan repayments before paying the worker.
How an umbrella company works
A typical labour supply chain has four parties:
- The client: the business that needs temporary workers.
- The recruitment agency: finds the worker and has the contract with the client.
- The umbrella company: employs the worker, pays their wages and invoices the agency for the time worked.
- The worker: does the work for the client.
Before an assignment starts, the agency must give the worker a key information document. It names the umbrella company and shows the rate paid to it, what the umbrella company will deduct and the worker’s minimum gross pay. The advertised rate is often higher than the worker’s gross pay because it usually includes the umbrella company’s operating costs.
What changed on 6 April 2026
From 6 April 2026, the agency that contracts with the end client is responsible for making sure the umbrella company operates PAYE correctly. If there is no agency in the chain, that responsibility sits with the end client. If an umbrella company underpays PAYE, HMRC can recover the difference from the agency or the end client.
The rules cover new and existing supply chains and apply to money paid to workers on or after 6 April 2026. If you engage umbrella workers directly, or your agencies use umbrella companies, it is worth checking how PAYE is being operated in your supply chain. HMRC’s guidance sets out who is responsible for what.
Umbrella companies and IR35
IR35, also known as the off-payroll working rules, applies to contractors who provide their services through their own limited company or another intermediary. HMRC says the rules are unlikely to apply if the worker is employed by an umbrella company, because the umbrella company already employs them and runs PAYE.
Where the rules do apply, the client is usually responsible for deciding the contractor’s employment status for tax and for giving them a status determination statement. The exception is a small client outside the public sector: in that case, the contractor’s own intermediary decides. This has been the position in the private sector since 6 April 2021.
This is also why roles assessed as “inside IR35” are often routed through an umbrella company. Instead of invoicing through their own company, the worker becomes an employee of the umbrella company for the assignment.
What umbrella workers are entitled to
An umbrella company employee has the same employment rights as other employees. That 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, if they are eligible
- paid holiday, either as “rolled-up holiday pay” added to each payslip or calculated separately
Pitfalls to check before you use one
- PAYE that is not operated correctly. Since April 2026, underpaid PAYE can be recovered from the agency or the end client, so the umbrella company’s payroll practices are your risk too.
- Mini umbrella company fraud. HMRC warns about supply chains where one umbrella business is split into many small companies, each employing a handful of workers. You should be clear about who pays the workers, how they are paid and who files the returns. HMRC lists the warning signs and checks.
- Pay that does not match. The worker’s gross pay should match the key information document, and the deductions on the payslip should match their tax and National Insurance records. HMRC has a tool to work out pay from an umbrella company.
Umbrella company, direct hire or Employer of Record?
An umbrella company suits short, agency-led assignments. If you want the person to be your own employee, the right option depends on where they are and whether you have a legal entity there:
- You have a UK entity: hire the person directly and run payroll yourself, or outsource UK payroll.
- You do not have an entity in the country: an Employer of Record employs the person on your behalf, runs local payroll and handles employment compliance, while they work for you day to day.
TopSource provides UK payroll and Employer of Record services. Talk to our team about the right option for your hiring plans.
