Will umbrella company regulation spark mergers and acquisitions?

The prospect of regulating umbrella companies has been a ‘hot’ topic for years, with policymakers told since time immemorial to address issues such as worker exploitation, non-compliance with HMRC rules, and lack of transparency.

Context is king -- as is the government’s Oct 30th announcement

Today’s momentum around regulation stems from Labour’s announcement on October 30th 2024 that recruitment agencies will be required from April 6th 2024 to account for PAYE (income tax and NIC) on payments to workers supplied via umbrella companies.

As someone in this vibrant sector who recently sold their own business, I’m going to address whispers on whether umbrella company regulation is likely to lead to umbrella mergers, acquisitions of umbrella companies by recruitment agencies, or neither, writes Louise Rayner, founder of NumberMill, and CEO of LRay Consulting.

An overdue leveller

Businesses and stakeholders are currently assessing how the potential regulatory changes might reshape the market. History suggests that regulatory shifts often spur consolidation, and the umbrella sector is no stranger to such activity.

But back to the present -- most players in the umbrella market and the labour supply chain, particularly within the temporary labour market, are vocally welcoming regulation, largely because it has the potential to level the playing field and establish consistent standards.

Drivers of consolidation in the umbrella company market be like…

Consolidation in the umbrella sector is being driven not just by impending regulation but also by broader market forces.

General economic uncertainty and the negative impact of an economic downturn have created challenges for smaller players. Margins have been squeezed due to difficult market conditions. And the proposed increase in Employer’s National Insurance Contributions (ER NIC) from April 5th 2025 is further increasing the costs to employers of engaging workers. This impending increase has already led to a reduction in demand for workers, as employers cut back and raise the ‘entry point’ at which they are prepared to pay for umbrella companies’ services, thus creating additional barriers for smaller brollies.

'Get out now' to crystalise gains

Adding to this, concerns among business owners about the continual erosion of Capital Gains Tax (CGT) relief have prompted some to ‘get out now’ and crystalise their gains while they still can.

Furthermore, uncertainty caused by the new Labour government and the lack of clarity surrounding the Employment Rights Bill has the potential to introduce significant employer obligations and costs, making navigating the market untenable for smaller players in the umbrella market.

These conditions exacerbate the reality before all these changes came along – that the return for an umbrella is often insufficient to sustain smaller operations.

Recruitment agencies, the unlikely acquirers

The idea of recruitment agencies acquiring umbrella companies has therefore been floated.

But it’s not likely going to be widespread or much of a ‘trend.’

Many agencies already maintain close partnerships with umbrellas, so I can see how it’s been suggested.

Two reasons contractor staffing agencies aren’t all rushing to snap up umbrellas

But owning a brolly outright poses significant challenges for agencies for two key reasons:

1. Conflict of interest: Recruitment agencies must remain neutral in offering payroll options to contractors. Owning an umbrella company could create perceptions of coercion or lack of choice, which might harm the agency’s reputation.

2. Regulatory implications: Regulation could make agency ownership of umbrellas untenable, as stricter compliance and transparency rules might highlight conflicts of interest.

While a few agencies with deep resources and strategic goals might consider acquiring an umbrella company, such activity is likely to be muted, even if April 6th 2026 might focus minds and sharpen the appetites of those agencies already exploring such an avenue.

Rather, the focus is shifting towards other types of consolidation.

The roles of private equity and larger umbrella players

The real drivers of consolidation in the umbrella market are larger players and private equity firms.

Bigger umbrella companies are actively acquiring smaller competitors to enhance their economies of scale, expand their client base, and solidify their market positions.

Meanwhile, private equity investors see long-term value in the sector and are leveraging the compounded benefits of offering additional services, such as pensions and employee benefits, alongside payroll solutions.

Umbrella company mergers and acquisitions to date

For example, notable mergers and acquisitions in the umbrella sector include the acquisition of Parasol and Clearsky by Optionis Group, and Workwell’s series of acquisitions (in order of acquiring; 6CATS, Whitefin, PGC Group).

Similarly, the sale of my very own NumberMill to a private equity buyer underscores the appeal of umbrellas for investors interested in the long-term compounded benefits of add-on services like pensions.

Having been part of this process, I now collaborate with the acquirers of NumberMill, supporting their efforts to acquire additional umbrella companies.

On that note, if you are an umbrella considering selling, you can contact me confidentially through my consultancy business (LRay Consulting), where I can guide you through the entire process.

Umbrella-to-umbrella mergers

While some speculate that smaller or mid-sized umbrellas might join forces to better compete against dominant players, this outcome is less about aligning operations and more about owners wanting to crystalise their gains.

Pooling resources and sharing compliance costs could theoretically strengthen their market presence.

But the reality is that many smaller players see consolidation as a way to exit the market amid mounting pressures. The consolidation trend is predominantly driven by acquisitions from larger players or private equity-backed firms.

Conclusion: A consolidation-driven 2025-26, and 2026-27

Ultimately, the umbrella market’s future in a regulated landscape (currently from April 6th 2026) will be shaped by multiple factors. Consolidation is inevitable, driven not only by regulation but also by economic uncertainty, tax pressures, and market dynamics.

The dominant forms of consolidation will likely come from larger umbrella players and private equity investors, leveraging scale and additional services to drive long-term growth.

Recruitment agency acquisitions, while of course possible, are unlikely to become a widespread trend due to conflicts of interest and potential regulatory hurdles.

Instead, acquisitions by bigger brollies will continue to reshape the market in 2025-26, and 2026-27.

For many smaller players, navigating this complex environment will prove increasingly difficult, potentially making now the right time to consider exiting the market.

Final thought if you’re a brolly wanting to be bought: COMPLIANCE

That’s where my consultancy business hopes to come in, because despite the uncertainty of the umbrella market's future, guidance you can absolutely rely on and a steady, experienced hand are definitely going to be vital for those who don’t merge or acquire but wish to be acquired.

If that’s you -- keep in mind, buyers in this space are only interested in COMPLIANT players. With my now-sold accountancy firm, the ‘ACCA’ badge was similar, insofar as it gave instant credibility to the business -- and then our track record did the rest. So compliance is top of a buyer’s checklist. And hey presto, we’re almost back to where all this talk of mergers and acquisitions in the umbrella company sector started in the first place -- regulation.