Blogs

Recent guidance from HMRC, updated in May 2025, highlights the government's increasing focus on compliance in the umbrella market. For workers, this means closer attention to how payments are made and whether those arrangements meet legal tax requirements.

This article outlines what contractors need to look out for. It draws directly from HMRC’s published guidance and is intended to help contractors navigate the umbrella model with greater clarity and confidence.

 

Compliance Responsibilities Are Changing

According to HMRC, from April 2026, recruitment agencies will take responsibility for operating PAYE when a worker is placed through an umbrella company. This is part of a wider review of the umbrella sector and reflects growing concern about non-compliance.

A legislative change is also planned. The Employment Rights Bill is set to bring umbrella companies into the legal definition of an employment business, which will allow them to be more effectively regulated.

The current guidance provides a clear picture of what good practice should look like and where problems can arise.

 

If Higher Pay Is Promised, More Questions Should Be Asked

Some umbrella companies promote payment models that appear to increase take-home pay. HMRC warns that contractors must still ensure their tax and National Insurance contributions are correct. Even if a worker is officially employed by the umbrella company, they are not exempt from responsibility for what is declared and paid.

If a company offers an arrangement that appears unusual or difficult to understand, it may not be operating within the law. The guidance outlines a number of indicators that may point to tax avoidance.

 

Clear Warning Signs to Watch For

HMRC lists four key signs that may suggest a worker is being drawn into a tax avoidance scheme.

The following points are not assumptions or general indicators. Each one relates to a specific method that has previously been used to bypass PAYE rules.

1. Non-taxable loans or separate payments

A common warning sign is a payment described as a loan or something similar that is claimed to be non-taxable. This type of arrangement has been widely used in the past to disguise earnings and reduce tax liabilities.

If a worker is told that part of their income is a loan that does not need to be repaid, it is likely that the company is not operating a standard payroll model. HMRC continues to take enforcement action in this area.

2. Pay that is higher than shown on the payslip

If the amount received into a worker's account is more than what appears on their payslip, it could mean that part of their pay has been processed outside the official payroll system. This difference is a clear sign that the umbrella company may be failing to apply tax and National Insurance properly.

3. Payments from someone other than the umbrella company

If any part of a worker's pay comes from a company other than their named employer, it may indicate an attempt to break the link between employment and pay. HMRC expects all employee pay to come directly from the umbrella company.

Any arrangement that splits this process across different parties introduces risk and may not meet legal requirements.

4. Requests to sign extra agreements

If a worker is asked to sign a separate agreement in addition to their employment contract, this should prompt further questions. A second agreement could be used to introduce separate financial terms or commitments that are not covered in the employment documentation. These may relate to a disguised payment structure or other arrangement that weakens the employment relationship.

 

Taking Control of Your Pay

Even where a worker is employed by an umbrella company, they are entitled to full visibility over their pay and deductions. Payslips should clearly show gross pay, the deductions made, and net pay after tax. HMRC suggests that workers also check their pension, student loan, and personal tax accounts to make sure the right contributions are being made.

Another sign to watch for is frequent changes in the umbrella company or its PAYE reference. If the employer name on payslips changes often, and the worker was not informed or consulted, this could point to a wider problem. This practice can affect employment history and make it harder to access credit or apply for a mortgage.

 

What to Do If You Are Concerned

HMRC provides a digital tool to help workers check whether they may be part of a tax avoidance arrangement. The tool explains how to report concerns and how to bring tax records up to date.

Contractors should always be able to question what they are paid, how it is calculated, and where it comes from. If an umbrella company is unwilling to explain its model or offers answers that do not make sense, workers should not accept the arrangement without further advice.

Connect with Payme to ensure full compliance. We support contractors and agencies in spotting risks early and understanding what a compliant umbrella arrangement should involve. Clear payslips, proper deductions, and no hidden terms.