Umbrella companies are common across the UK temporary recruitment industry, but they also introduce compliance and financial risk that agencies can no longer afford to overlook. With regulatory changes on the horizon, understanding how umbrella companies operate and where responsibility sits is critical for agency owners and leaders.
What Is an Umbrella Company?
An umbrella company is a third‑party employer that sits between a recruitment agency and a contractor. Instead of the agency employing the worker directly, the contractor becomes an employee of the umbrella company. The agency pays the umbrella company directly, which then processes payroll, deducts taxes and pays the worker.
For contractors, this structure provides access to statutory employment rights such as holiday pay, pension contributions and sick pay. For agencies, it can simplify payroll administration. However, using an umbrella company does not remove responsibility or risk from the agency.
Why Umbrella Companies Matter to Recruitment Agencies
Umbrella companies have grown in popularity as off‑payroll working rules and employment regulation have evolved. They offer agencies flexibility when supplying temporary labour and give contractors a straightforward employment option.
At the same time, the way an umbrella company operates its payroll and manages compliance can have a direct impact on the agency. As regulators place more accountability on the supply chain, agencies are increasingly expected to understand the model they are allowed to operate under their brand.
The Compliance Risk Is Increasing
From April 2026, UK legislation will significantly increase agency exposure to payroll risk. Recruitment agencies may be held liable for unpaid PAYE and National Insurance where an umbrella company fails to meet its obligations.
This represents a major shift. Even where an agency has carried out due diligence or relied on contractual assurances, HMRC will be able to pursue the agency for any shortfall. Umbrella companies can no longer be treated as low‑risk, hands‑off suppliers.
The Ongoing Risk of Non‑Compliant Umbrella Models
Despite increased scrutiny, non‑compliant umbrella models still exist in the market. Some promote higher take‑home pay through complex or misleading pay structures that fall outside standard PAYE arrangements.
Common warning signs include unclear payslips, unexplained deductions and pay calculations that are difficult to understand or explain. While these models may appear attractive to contractors, they expose agencies to financial, legal and reputational risk.
Taking a More Proactive Approach
As responsibility increases, agencies need stronger oversight of their umbrella relationships. This means working with providers that can demonstrate transparency, consistency and compliance over time, not just at onboarding.
Clear communication with contractors is equally important. Workers should understand who employs them, how their pay is calculated and what deductions apply. Many agencies manage this through a preferred supplier list of approved umbrella companies, helping to maintain consistency and reduce risk across placements.
What Agencies Should Be Thinking About Now
With regulatory change approaching, now is the right time for agencies to review existing umbrella partnerships, revisit contractual protections and ensure internal teams are confident explaining umbrella arrangements to candidates.
Further regulation of umbrella companies is widely expected. The direction of travel is clear: greater transparency, higher standards and more accountability across the recruitment supply chain.
Final Thoughts
Umbrella companies remain an important part of the UK recruitment ecosystem when managed correctly. They can support flexible workforce models and reduce operational pressure, but they also introduce risks that agencies must actively manage.
At APositive, we believe strong compliance creates sustainable agency growth. Taking a proactive approach to umbrella relationships today will help protect your business, your contractors and your reputation as the landscape continues to evolve.
Get in touch with APositive to start the conversation.
