Employer of Record vs Umbrella Company: UK Guide
An umbrella company employs temporary contractors placed by agencies and runs their pay through PAYE. An Employer of Record (EOR) employs a person you chose, usually long term, in a country where you have no entity. Since 6 April 2026, the agency, or you if there’s no agency, can be liable for PAYE an umbrella fails to pay.
Last reviewed: November 2026
What is the difference between an Employer of Record and an umbrella company?
They solve different problems. An umbrella company is a payroll vehicle for temporary contractors in a labour-supply chain. An EOR is a legal employer for the people you would otherwise hire through your own entity.
HMRC describes umbrella companies as “employment intermediaries that employ workers on behalf of agencies and end clients”. About 700,000 people in the UK work through one (source: GOV.UK, Umbrella company market: changes to Income Tax rules).
| Umbrella company | Employer of Record | |
|---|---|---|
| Who finds the worker | A recruitment agency | You |
| Typical engagement | Temporary assignment, day or hourly rate | Permanent or fixed-term employee |
| Contract chain | Worker → umbrella → agency → you | Worker → EOR → you |
| Who is the employer | Umbrella company | EOR |
| Who funds employer costs | Usually deducted from the contractor’s assignment rate | You, on top of salary, in a quoted monthly fee |
| Who manages the relationship | The agency | You manage the day-to-day work; the EOR handles employment and payroll |
| Built for | Flexible UK contract labour | Hiring in countries where you have no entity |
| Cross-border use | UK-focused | Designed for multi-country hiring |
How does an umbrella company work?
The contractor becomes an employee of the umbrella. The agency pays the umbrella an assignment rate. From that rate, the umbrella takes its margin and the employer-side costs, then runs PAYE and pays the worker.
- The agency places the contractor with you, the end client.
- You pay the agency.
- The agency pays the umbrella company the assignment rate.
- The umbrella deducts its fee and employer costs, then runs PAYE income tax and National Insurance.
- The contractor receives net pay and a payslip from the umbrella.
When the umbrella is compliant, this works. The problem is the umbrellas that aren’t. The government says too many are used to enable non-compliance, including tax avoidance and tax fraud.
What changed for umbrella companies on 6 April 2026?
Liability moved up the chain. From 6 April 2026, the recruitment agency that contracts with the end client is jointly and severally liable for PAYE that an umbrella company fails to pay. If there is no agency and you contract directly with the umbrella, the liability is yours.
- Income Tax: a new Chapter 11 in Part 2 of ITEPA 2003 sets out joint and several liability for PAYE (HMRC Employment Status Manual, ESM2420).
- National Insurance: the Social Security Contributions (Umbrella Companies) Regulations 2026 (SI 2026/388) extend the same liability to Class 1 NICs from 6 April 2026.
- Who is pursued: HMRC can go after the agency first. Where the client contracts directly with the umbrella, the client is the relevant party. Separate rules apply when the parties are connected, or when the umbrella is overseas.
For end clients, the effect is indirect but real. Agencies are now pricing in that risk, tightening due diligence and cutting umbrella suppliers. If your contingent workforce runs through a long umbrella chain, expect more questions and higher rates.
HMRC’s definition of an umbrella company is functional, not a label. The test in ESM2415 looks at whether the business employs the worker and performs the employer’s tax obligations in a labour-supply arrangement, whatever it calls itself. Whoever employs your UK people on your behalf, ask them how they have assessed their position under Chapter 11.
How does an Employer of Record work?
The EOR becomes the legal employer of a person you have recruited. You decide who to hire, what they do and what they earn. The EOR issues a locally compliant employment contract, runs payroll, withholds tax, pays statutory contributions and administers benefits.
- You choose the candidate and agree salary and role.
- The EOR issues a local employment contract.
- Each month the EOR invoices you for salary, employer costs and its fee.
- The EOR runs payroll and pays tax and social contributions to the local authorities.
- You manage the work. The EOR handles employment administration and compliance.
The worker is your team member in everything but the legal contract. There is no agency in between and no assignment rate. Employer costs are not taken out of the worker’s pay.
Which should you use: EOR or umbrella company?
Choose on three things: who finds the worker, how long you need them, and how many countries are involved.
| Your situation | Better fit | Why |
|---|---|---|
| Temporary UK contractor sourced by an agency | Umbrella (via a vetted agency) | The agency owns sourcing and the supply chain |
| Permanent UK hire, no UK entity yet | EOR | Hire now; set up an entity later if volumes justify it |
| You found the person yourself and want them long term | EOR | No agency margin; direct relationship |
| Team spread across the UK, EU and APAC | EOR | One contract model across countries instead of a chain per market |
| Hire who needs a visa or will relocate | EOR with mobility support | Sponsorship and relocation need an accountable employer |
| Short project, outside-IR35 specialist | Neither: a compliant contractor agreement | Possible only where the status determination supports it |
Two traps come up repeatedly:
- Using an umbrella to stand in for permanent employment. A long-running “temporary” contractor who works like an employee is an employment-status and cost problem waiting to happen.
- Treating IR35 as the umbrella’s problem. Under the off-payroll working rules, medium and large clients decide the worker’s status and issue a Status Determination Statement (GOV.UK, Off-payroll working rules for clients). An umbrella doesn’t remove that duty.
Worked example: a Singapore SaaS hiring its first UK engineer
A Singapore-headquartered SaaS company wins its first UK enterprise customer and needs a senior solutions engineer in London. It has no UK entity.
- Route 1: agency plus umbrella. The agency finds a contractor and pays them through an umbrella. That’s fast. But the engineer is on an assignment, the agency takes a margin, and the company holds a chain of contracts it doesn’t control. Under the off-payroll rules, the company would also need to work out whether it counts as a medium or large client and, if so, issue a Status Determination Statement.
- Route 2: EOR. The company recruits the engineer directly and hires them through an EOR on a UK employment contract with standard statutory rights. Payroll, PAYE and pension auto-enrolment run through one provider. When the company hires its fifth UK person, or its first in Malaysia, the model stays the same.
The company went with Route 2. The deciding factor wasn’t cost. It wanted the engineer to be its own employee, not a supplier’s.
Where AgileHRO fits
AgileHRO is an Employer of Record, payroll and global mobility provider headquartered in Singapore, with in-country capability in the UK and across APAC and LATAM. We are not an umbrella company and don’t sit in agency supply chains. We employ the people our clients choose on their behalf.
What makes us different is that hiring, payroll and mobility come from one provider. A UK engineer who later moves to Singapore or Brazil stays with the same partner. You won’t need to hand them across three vendors.
Before you decide, estimate the full employer cost with the Employment Cost Calculator. If you’re weighing a UK entity against an EOR, compare the two on cost and speed.
This article is general information, not legal or tax advice. Get advice on your specific arrangement.