The pros and cons of regulating the umbrella company sector

The pros and cons of regulating the umbrella company sector

There has been a long-standing wish from numerous stakeholders in the temporary workforce sector for the government to regulate umbrella companies. However, is regulating the umbrella company industry the correct solution to improve compliance and protect contractors, freelancers and agency workers? We’ve had a look at the pros and cons of regulating the umbrella company sector, and have summarised them in this article. We would love for you to share your views in the comments below.

Why are there calls for the government to regulate the umbrella company sector?

Since IR35 came into fruition over 20 years ago (2000), umbrella companies started making their way into the UK’s payroll sector. Nowadays, demand has never been higher, and over half a million temporary workers use umbrella companies for their payroll.

Over the years, IR35 changes have made it more challenging for contractors to compliantly operate through a limited company (outside IR35). For those who are inside IR35, a majority of end clients and recruitment agencies don’t like having temporary workers on their payroll. As a result, they choose to outsource payroll responsibilities to umbrella companies. Outsourcing payroll reduces an organisation’s administrative responsibilities, saves plenty of time, decreases running costs and reduces liability (employment-related law).

A majority of umbrella companies provide an ethical and high-quality payroll service to their employees (PAYE). Most of these umbrella companies also offer more than just PAYE payroll, such as insurance, employee benefit packages, and more. They also don’t retain much income for themselves. Did you know the only income a compliant umbrella company generates for itself is the margin they deduct? The rest of the deductions are sent to HMRC.

However, some unscrupulous umbrella companies (tax avoidance schemes and disguised remuneration arrangements) have targeted temporary workers to exploit them and make some quick money. They do this by either promising inflated pay retention opportunities or sneaking into the supply chain. For example, it’s been known for dodgy umbrellas to build relationships with equally-dodgy recruitment agencies that, in turn, would accommodate referred candidates. An example of this was the recent mini umbrella company scandal – where candidates were referred to an external payroll company against their knowledge.

There have also been some recent accusations against an unnamed umbrella company accredited by the Freelancer and Contractor Services Association (FCSA). To put it simply, the umbrella in question has been accused of unethically retaining the accrued holiday pay of its employees. If this did happen – it’s appalling, and the umbrella company should be named and shamed and most certainly avoided by all in the future.

It is also worth mentioning that some temporary workers have deliberately engaged with dodgy umbrella companies to retain more of their money. Still, sadly, some have encountered dodgy payroll providers against their knowledge. Either way, a small number of umbrella companies have tainted the sector’s reputation, and more stakeholders than ever before are fighting for the government to roll out some tight umbrella company regulations.

The pros of regulating the umbrella company sector

Protect temporary workers

Assuming regulating the umbrella company sector makes it more difficult for unscrupulous umbrella companies to target UK workers – who can argue! This is undoubtedly the outcome every stakeholder wants. No temporary worker should ever have to worry about being paid compliantly.

Clear up confusion

Umbrella companies are complex, and it’s no surprise that some contractors, freelancers and agency workers don’t fully understand how they operate. If the government regulated the industry, it would be great to provide more guidance targeted at those who’ll engage with umbrella companies for their payroll.

Address serious issues

Umbrella companies aren’t perfect. Take the employment costs, for example (Employer’s National Insurance Contributions and the Apprenticeship Levy). Umbrella companies are not deducting these from the assignment rates of their employees’ for fun – they’re deducting them and are sending the funds to HMRC as they have to. This takes us on to our next point below.

The chance to amend other issues

While regulating the industry, maybe the government will finally address the UK’s taxation of temporary workers and offer more straightforward and understandable solutions. Many stakeholders feel the government is neglecting the self-employed.

Perhaps the government should show a sign of solidarity to self-employed professionals and make it easier for them to flourish. We don’t see any problem whatsoever with organisations outsourcing their payroll to specialist companies (such as umbrella companies), but the whole process needs to be more transparent and easier for everyone in the supply chain to understand.

Protect compliant umbrella companies

We say this a lot, but most umbrella companies provide dependable services for temporary workers. Therefore, regulating the industry could help trustworthy umbrella companies stand out and secure business while others fade out of the marketplace.

The government would be proactively acknowledging legitimate umbrella companies

Regulating the industry would mean the government has acknowledged the sector and confirmed some umbrellas are perfect for temporary workers to use. At the moment, some government guidance exists, but the government is extremely cautious about positively recognising the existence of compliant umbrella companies. We have never understood why this is. After all, compliant umbrella companies help ensure that temporary workers pay tax and National Insurance Contributions (PAYE). Why wouldn’t the government love them?

Put an end to unfounded and misleading smear campaigns from so-called experts

Since umbrellas have been in the UK, they’ve come under scrutiny – especially during the coronavirus pandemic. Suppose an umbrella behaves unethically or against the best interests of their employees (shame on them). They deserve to be publicly named and shamed. However, there have been multiple cases where umbrella companies have had their hands tied by government regulations and UK law – yet some third parties have claimed they’ve been acting unethically and deserve to be punished.

Take furlough, for example. We’re not going to write about the ins and outs of furloughing umbrella employees, but it wasn’t black and white. The government failed to address many issues that put umbrella companies at risk of bankruptcy should they interpret existing rules incorrectly.

In our opinion, many of the bodies or groups that started campaigning against umbrella companies during the pandemic have an ulterior motive. Perhaps they’re looking to profit or have a vendetta against umbrella companies because they’ve lost income due to fewer contractors inside IR35?

The cons of regulating the umbrella company sector

What if the new regulations are garbage?

Regulations are great, assuming they’re written by independent experts that understand the issues at hand. This may sound daft, but the regulations need to be good if the government regulates the industry! There is no point regulating the umbrella company sector if all it does is add further confusion into the mix.

Self-regulating bodies already exist and there is a chance the government might ignore them

We are firm believers that the FCSA and Professional Passport are wonderful organisations that do everything possible to protect the UK’s temporary workforce. However, they’re sometimes faced with unhappy entities accusing them of this and that (e.g. the accrued holiday pay claims against an FCSA member).

Both bodies have worked tirelessly to fight for temporary workers’ rights and tidy up the supply chain. If you’re looking to use an umbrella company, we recommend using an FCSA or Professional Passport accredited one. Both organisations have their strict codes of compliance – and they’re excellent. Not only are they frequently updated to the ever-changing marketplace, but they would also provide the government with an extensive framework for their regulations – should they decide to implement them.

The government must engage with both the FCSA and Professional Passport if regulations roll out into the umbrella company sector. And, we hope both professional bodies are left alone to continue doing what they’re doing because they’re a real asset.

May cause more harm than good

As we’ve mentioned, compliant umbrella companies don’t earn much income themselves from a temporary worker. However, they do ensure their employees pay the correct tax and National Insurance Contributions. They should be supported by the government, but more should be done to protect workers too.

The recent announcement from Boris Johnson regarding the National Insurance hike of 1.25% is an example of the government failing to support and acknowledge umbrella employees. Therefore, regulating umbrella companies may result in the government coming down even harder on those who use them for payroll – even if they don’t do it directly.

More needs to be done to stop unscrupulous companies from entering the sector

Criminals won’t care if the industry is regulated or not because they will continue to exploit loopholes and target vulnerable workers. The government need to roll out more policies to put a stop to unethical payroll providers. We’re concerned that despite regulating the industry, this won’t stop tax avoidance and unethical criminals from profiting.


Ultimately, anything that the government can do to provide temporary workers with further protection regarding their payroll is a good thing. However, the self-regulating bodies that exist at the moment are doing a good job ensuring the supply chain of temporary workers is compliant.

Regulations or not – non-compliant umbrella companies and payroll intermediaries will still exist because the criminals behind them won’t disappear. They will continue to prey on vulnerable temporary workers and will do everything in their power to bypass government rules and regulations to line their own pockets.

Education is critical, and an official government “guidance package” on all-things umbrella companies would be excellent. We’ve tried to cover all bases with the content on – but government-stamped materials would provide additional clarity and peace of mind to all those in the supply chain.

Top 10 umbrella companies

Before you choose an umbrella company, you must conduct due diligence. See what’s out there and make sure you pick a trustworthy payroll provider. To help make your life easier, we’ve created a list of our top 10 umbrella companies – the perfect place to start your umbrella company hunt. Each of our top 10 is accredited by either the Freelancer and Contractor Services Association (FCSA) or Professional Passport – the UK’s leading professional bodies. Therefore, you can be sure you’ll be in the safest hands. And, some have special offers at the moment – even more reason to check them out!

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Click here to see our top 10 umbrella companies!

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