Reports of umbrella companies’ death are greatly exaggerated

I don’t profess to be legally qualified to understand the technical fine print of everything announced at Autumn Budget 2024 regarding the HMRC policy paper “Tackling non-compliance in the umbrella company market.”

However, I do have 25 years of commercial experience observing umbrella companies adapt and thrive when legislation is enacted. As a former director of SThree, I also know a bit about agencies, writes Andy Hallett, managing director of Recspand.

Umbrella companies’ death is being greatly exaggerated  

I read this article opining on the likely “death” of umbrella companies (as we know them) as a direct result of the envisioned legislation. I think the report’s author is working on the wrong premise of ‘debt transfer,’ as opposed to the ‘deemed employer’ option selected by the Labour government.

In any case, I couldn’t disagree more with the article’s author, Martyn Valentine, on most of the points made.

History repeating itself

It’s worth remembering that the point of ‘death’ has been upon us many times before.

We’ve had IR35 (a trilogy—2000, 2017, 2021), the Agency Workers Regulation (AWR), the Managed Service Companies legislation (2007), the Offshore/Onshore Intermediaries rules, and the Travel & Subsistence rules of 2016.

I’ve likely missed a few along the way but my point here is that each and every time that they have been legislatively attacked, umbrella companies and accounting firms have adapted, innovated, and restructured their services.

The trap

Those who take the view that umbrella companies will no longer be viable in their current form tend to fall into the trap of bundling ‘compliant’ and ‘uncompliant’ firms under the same ‘umbrella.’

It’s my strong view that today’s large, compliant umbrella organisations that collect billions in PAYE for HMRC will thrive under these incoming regulations. These big brollies, who I have spoken with since the chancellor’s announcement on October 30th, are excited that their compliant operations will win under these new rules.

It's a fact that contractor recruitment agencies use umbrella companies for convenience. It’s also a fact that an agency’s core business is the activity of finding jobs and filling them with candidates.

What’s not to like?

By contrast, the operation of payroll and onboarding/offboarding of contractors does not add value to their bottom line. And the service cost for an umbrella is borne by the worker. So for these two entities, what’s not to like?

A well-set-up and certified umbrella company, by the likes of the FCSA or Professional Passport, poses a significantly lower risk and cost than an agency setting up its own payroll. If agencies do choose to set up payroll themselves in the future, then I suspect the large accounting firms (who run the big umbrellas) will thrive as outsource partners.

Where HMRC’s policy paper signals a difference

The big difference with the legislation outlined in “Tackling…” is that this time around, agencies and end-clients will have to understand their supply chain, as there will be an actual HMRC liability if anyone downstream acts non-compliantly.

For many years, agencies have unconsciously (and consciously in some cases), allowed workers to use providers who run dubious schemes, safe in the knowledge that as long as they are not actively pushing these arrangements, there is little-to-zero risk.

Sleepless nights about the Criminal Finance Act 2017 just haven’t really materialised.

One death I’ll be hoping for? MUCs’

What has materialised is Mini Umbrellas Companies, and schemes offering 85% take-home pay. Both are still very much in vogue in sectors such as healthcare and hopefully, the April 6th 2026 regulation will call time on such operators and practices.

But at the same time (or by the autumn of 2026 at the latest), we’ll also see the introduction of enhanced worker rights that kick in on day one.

What I’ll be advising, ahead of a return to outside IR35 working

Along with the tax risks noted above, I will be advising recruitment agencies NOT to take added employment risk onto their books. Instead, a compliant umbrella company can perform the task of employment in a repeatable and cost-effective manner, at zero risk and cost to the agency.

Where I do agree with the article ‘How debt transfer will hit umbrella companies in 2026,’ is where it opines that the case for hiring independent contractors outside IR35 will become more compelling due to the regulatory plan.

Many end-clients have introduced blanket bans on outside IR35 limited company hiring since the IR35 reforms in the public and private sectors, but with the increase in employers NI, my expectation is that they will re-look at how to bring genuine freelancers back into their businesses.

Incoming: Mergers & Acquisitions

In addition, we will see further consolidation in the UK umbrella industry.

The cost of being compliant along with enhanced worker rights will mean that only the larger organisations, with their economies of scale, will be able to make it work.

If agencies are to continue to trust umbrellas to operate PAYE on their behalf, then they will likely move towards the very largest providers who will be able to offer indemnities backed up by a strong balance sheet, and that have the ability to pay.  Smaller firms won’t be able to offer or back up this guarantee.

But as I said at the top, and as I’m hearing day in day out; good and compliant umbrellas have nothing to fear from the April 6th 2026 changes and everything to gain.