Recruitment agencies play a far more significant role in the umbrella market than many realise. When an agency refers a contractor to an umbrella company — whether through a Preferred Supplier List (PSL) or informal recommendation — the agency inherits a level of compliance responsibility. And with HMRC scrutiny rising, and major reforms expected in 2026, recruiters can no longer afford to treat umbrella referrals as an administrative afterthought. With regulated bodies such as FCSA and so many compliant Umbrella Companies to chose from, there are still things recruiters must know before referring contractors to umbrella companies.
This guide sets out exactly what recruiters need to know before recommending an umbrella company, including key compliance checks, documentation requirements, risk areas, and the liability agencies could face if a contractor is placed with a non-compliant provider.
Why Umbrella Referrals Matter More Than Ever
Recruitment agencies have become part of the frontline in HMRC’s clampdown on disguised remuneration and payroll malpractice. If an agency knowingly — or unknowingly — funnels contractors into a non-compliant umbrella, the agency can be implicated in the supply chain.
That’s why recruiters must understand:
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What a compliant umbrella looks like
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How payroll should be processed
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Which red flags to avoid at all costs
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Why PSLs need ongoing maintenance, not a one-off setup
Even simple failings — like incorrect holiday pay or unexplained deductions — can lead to complaints, reputational damage, or regulatory exposure.
The Core Checks Every Recruiter Should Make
Before any umbrella company is added to your PSL (or recommended informally), certain checks should be non-negotiable. These ensure the umbrella operates legally, transparently, and within HMRC’s employment and tax regulations.
Key checks include:
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PAYE-only payroll: The umbrella must pay contractors through full PAYE, without loans, offshore structures or salary advances disguised as income.
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Transparent payslips: Contractors should receive a detailed breakdown of tax, NI, employer costs, holiday pay, and margin. No hidden deductions.
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Holiday pay compliance: Accrued or advanced holiday pay must be accurate and clearly documented.
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Proper employment documentation: Umbrellas must provide contracts of employment, Key Information Documents (KIDs), and itemised payslips.
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Pension auto-enrolment: Workers must be enrolled into a workplace pension automatically unless they opt out.
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FCSA or Professional Accreditation: Accreditation alone is not enough, but it adds an additional layer of due diligence.
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UK-based payroll: All PAYE processing should occur in the UK with UK bank accounts.
Recruiters should avoid umbrellas that “guarantee” inflated take-home pay — these are often tax avoidance schemes in disguise.
Understanding Your Liability as a Recruitment Agency
Many agencies assume that any misconduct is solely the responsibility of the umbrella. Unfortunately, this isn’t always the case. HMRC has made it clear that agencies can be held accountable if they are seen directing workers into questionable schemes.
Potential risks include:
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Chain liability under future umbrella reforms
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Financial penalties for involvement in tax avoidance
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Reputational damage among contractors
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Loss of client trust for placing workers through unsafe payroll models
The safest approach is to refer only to a carefully vetted PSL, and to avoid ad-hoc recommendations entirely.
Building (and Maintaining) a Strong PSL
A PSL shouldn’t be created once and left unchanged. Compliance standards evolve constantly, and umbrella providers can drift from compliant to non-compliant behaviour without warning. Recruiters should schedule regular reviews — ideally every six months — to reassess risks.
A good PSL review should include:
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Re-checking Companies House filings
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Reviewing contractor complaints and payslip issues
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Ensuring no new deductions or pay structures have been introduced
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Confirming proper pension, holiday pay and payroll processes
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Speaking directly to the umbrella’s compliance manager
If an umbrella falls short, remove it immediately. Keeping a poor-performing provider on a PSL exposes the agency and its contractors to unnecessary risk.
What Recruiters Must Explain to Contractors
Contractors often have limited knowledge of umbrella payroll, meaning recruiters must play an active role in setting expectations. This helps avoid confusion and minimises disputes.
Recruiters should clearly communicate:
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How an umbrella company operates
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The difference between assignment rate and gross pay
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Which employer costs will appear on the payslip
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How holiday pay is calculated and paid
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How pension auto-enrolment works
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Why compliant umbrellas won’t promise unusually high take-home pay
Clear communication reduces misunderstandings and builds trust with workers.
Red Flags Recruiters Must Avoid
Several behaviours should instantly disqualify an umbrella from your PSL:
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Take-home pay of 80–90%+ (almost always disguised remuneration)
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Loan / advance schemes (high HMRC risk)
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Offshore arrangements for UK contractors
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Unexplained deductions or unclear payslips
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Mini-umbrella models, where workers are moved between multiple small companies
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Holiday pay not clearly shown
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Refusal to provide contracts or KIDs
If a contractor reports any of these issues, investigate immediately.
Preparing for the 2026 Umbrella Reforms
The upcoming reforms mean agencies will face greater accountability for the umbrellas they engage with. Expected changes may include:
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Stricter PSL requirements
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Greater agency liability for supply chain non-compliance
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Mandatory due-diligence processes
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Tighter rules on holiday pay
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Higher transparency requirements for payroll deductions
Recruiters who prepare now will avoid last-minute disruption — and build a stronger, safer supply chain.
Final Thoughts
Recruiters are essential gatekeepers in the umbrella market. By understanding compliance risks, maintaining a robust PSL, and communicating clearly with contractors, agencies can protect themselves while supporting workers with fair, transparent pay.
The message is simple:
Do your due diligence now, and you’ll avoid serious compliance headaches later.
