What Is an Umbrella Company?

An umbrella company is, in HMRC's words, "a business often used by recruitment agencies to pay temporary workers". In most cases it employs the worker and pays their wages through PAYE. It does not find the work: the recruitment agency (legally, an employment business) does that, and the work itself is done for one of the agency's clients (gov.uk: Working through an umbrella company).

The money flows in two steps. The agency pays the umbrella company the assignment rate. The umbrella then takes off its own operating costs (sometimes called "margin"), employer National Insurance, the employer pension contribution, holiday pay and, where it applies, the Apprenticeship Levy to arrive at the worker's gross pay. Income Tax, employee National Insurance and any other employee deductions come off that gross figure before the worker is paid. The Key Information Document an employment business must give before agreeing terms includes a representative example of these deductions, so the worker can see the effect before they sign up.

Responsibility for the tax has shifted. For money paid to workers on or after 6 April 2026, HMRC says: "The agency or end client is responsible for making sure PAYE is operated correctly, when an umbrella company employs their workers. We can recover any underpayment of PAYE from them" (gov.uk: PAYE rules for labour supply chains that include umbrella companies).

Regulation of umbrella companies themselves is still to come. The government's Employment Rights Act timetable lists it among the measures taking effect in 2027 (gov.uk: Employment Rights Act timeline update).