Understanding umbrella companies

As a business engaging self-employed individuals, it’s vital to understand how umbrella companies operate, the risks involved, and the upcoming changes that could affect your business. With new upcoming reforms, it’s more important than ever to stay informed and ensure your operations are compliant.

The structure of umbrella companies

An umbrella company acts as an intermediary between a contractor and the end client. Its main function is to handle payments to self-employed people, deducting Income Tax and National Insurance Contributions (NICs) before passing on the final net pay.

Here’s how the arrangement typically works:

1. Client: The business or organisation that requires services, either on a freelance, contract, or full-time temporary basis.
2. Contractor/Self-employed individual: The individual delivering the service under agreed terms.
3. Umbrella company: A third-party entity responsible for payment processing, tax deductions, and ensuring legal and administrative obligations are met.

This structure is designed to streamline compliance and administration for contractors and clients and previously reduced the risk falling on end-clients. However, now it brings more risk than ever, especially when working with non-compliant providers.

What’s changing in 2026?

The UK government has announced significant reforms to address non-compliance in labour supply chains, with a strong focus on umbrella companies. These reforms are due to take effect from April 2026 and aim to strengthen accountability across the supply chain.

Here’s what to expect:

1. A clearer, statutory definition of umbrella companies to reduce ambiguity and improve oversight
2. Mandatory due diligence for businesses that engage umbrella companies
3. Liability for unpaid taxes by non-compliant umbrella companies could transfer to your business
4. A shift in PAYE responsibility from umbrella companies to recruitment agencies or even the end client
5. Increased tax risk for businesses further up the chain

These changes will bring more scrutiny meaning businesses will need to be vigilant in who they partner with.

What are the risks?

If your business engages a non-compliant umbrella company, you could unknowingly find yourself caught up in a tax avoidance scheme. Even if you didn’t intend to avoid tax, the consequences can be severe.

The key risks include:

1. Financial penalties and backdated tax liabilities
2. Legal action over misclassified employment status
3. Reputational damage that can impact client and contractor trust
4. Regulatory scrutiny and enforcement measures

The Autumn Budget 2024 reforms make one thing clear: responsibility is shifting. Businesses can no longer rely on umbrella companies alone for compliance. You need to be proactive.

You must protect your business

Avoiding unnecessary risk means taking action today. Here’s how to protect your business in light of the changes:

1. Do not treat self-employed contractors as employees – allow them control over how and when they work
2. Ensure you have clear contractual agreements that establish self-employment status
3. Avoid giving contractors benefits, set hours, or tools and equipment – these are signs of employment
4. Stay informed and proactive as policies and HMRC expectations evolve

How Wise support you in protecting your business

At Wise, we help businesses navigate compliance confidently and efficiently. Here’s how we support you:

1. We provide clear, practical guidance on best practices for contractor status and contracts
2. Our system prompts contractors to re-sign their Service Level Agreement (SLA) every 10 months – a subtle reminder of their self-employed status and a deterrent to employment claims
3. We keep you updated on any legislative or policy changes that could impact how you engage and manage your workforce

With Wise, you’re not alone in managing these changes – we’re here to ensure you’re ahead of the curve. Speak to us today for more information.