Do you use umbrella companies? If so, you will need to know about new legal reforms that are starting on 6th April.
The new rules surrounding what is known as Joint and Several Liability (JSL) mean that recruitment agencies – and in some cases, end clients – will be liable for unpaid PAYE and National Insurance Contributions (NICs) if the umbrella company they are using fails to meet its tax obligations. This is a major shift in responsibility for PAYE and NICs within the temporary labour market.
Why are the rules changing?
There has long been concern at HMRC about noncompliance in the umbrella company sector, including
- disguised remuneration schemes,
- miniumbrella models and
- failures to correctly remit PAYE and NICs.
It is estimated that about £500 million in tax is lost because of umbrella non-compliance, and while many umbrella companies operate correctly, too many are used to facilitate tax avoidance and fraud.
The new reforms are intended to close the legal and regulatory gaps by making other parties in the supply chain responsible if umbrella companies fail to meet their obligations.
What is an umbrella company?
An umbrella company acts as an employer for contractors and temporary workers, handling payroll (PAYE), taxes and administration on behalf of recruitment agencies or end-clients. It simplifies contracting, ensures compliance with IR35 regulations and provides continuous employment benefits. Typical fees range from £20 to £30 per week.
Key aspects of umbrella companies
- Role: The company employs the contractor and acts as an intermediary between the worker and the recruitment agency.
- Payroll and taxes: They process timesheets, invoice agencies and deduct tax/NICs (National Insurance Contributions) through PAYE.
- Benefits: Contractors get employee rights, including statutory sick/maternity pay and, in some cases, pension, while avoiding the administrative burden of a limited company.
- Suitability: Ideal for short-term contracts or those “inside IR35”.
What is joint and several liability (JSL)?
Under the new rules, if an umbrella company fails to pay PAYE or NICs, HMRC can take steps to recover the full amount from another party in the labour supply chain. This will usually be the recruitment agency, or – if there is no agency involved – the end client.
Liability is absolute, meaning that there is no defence of reasonable care, unlike the case with IR35. So even if an agency carries out audits or checks, they can still be held liable if PAYE or NICs remain unpaid. This liability will apply to all money that is paid to umbrella workers on or after 6th April 2026.
Effectively, this means that HMRC will collect tax missing from anywhere in the chain, from whomever it believes is the “relevant party”.
Who becomes liable?
1. Recruitment agencies
In most cases, first in line for liability will be the agency supplying the worker to the end client. If HMRC thinks that the umbrella company did not meet its PAYE and NIC obligations, it will pursue the agency.
2. End clients
End clients may become liable when no agency is involved (direct engagement with the umbrella), the agency is offshore or the agency is connected to the noncompliant umbrella.
In its policy paper on the changes, published in November 2025, HMRC said
“This measure will make recruitment agencies responsible for accounting for Pay As You Earn (PAYE) and Class 1 National Insurance (NICs) on payments made to workers that are supplied via umbrella companies. Where there is no agency, this responsibility will fall to the end client business.”
3. Purported umbrella companies
In some cases, an umbrella company seems like it employs the worker but in fact does not genuinely do so. If this is the case, HMRC may decide to classify the arrangement as direct employment for the purposes of tax. That means that the agency or end client will become liable for missing PAYE and NICs.
What will these rules mean for businesses?
Increased compliance responsibility
Both recruitment agencies and clients will need to make sure that they operate PAYE correctly. As we have seen, HMRC can recover underpaid tax from them, regardless of intent or due diligence.
Greater due diligence expectations
It is expected that HMRC will want to see stronger vetting of umbrella partners, ongoing checks around payroll operations and deductions and clearer documentation and recordkeeping. However, even the most thorough checks reduce liability rather than eliminating it.
Potential supply chain restructuring
Given the new rules and the administrative workload that they will introduce, some businesses may decide to use fewer umbrella companies and move those workers onto agency payrolls instead, thus avoiding the indirect liability that we mentioned above.
This may change workers’ employment status (e.g., becoming agency limb (b) workers).
What are limb (b) workers?
Limb (b) workers (defined under the Employment Rights Act 1996) are individuals with a contract to perform work personally, often in casual or gig-economy roles. While not full employees, they have “worker” status, granting them core statutory rights like the National Minimum Wage, holiday pay and protection against discrimination.
Key aspects of limb (b) workers:
- Casual relationships: Work is often on-demand, without guaranteed hours.
- Personal service: They are generally required to do the work themselves.
- Rights from day one: They do not require a qualifying period for key rights.
- Agency context: Agency workers are often classified as limb (b) workers if they have a contract with an agency but work for an end-user, entitling them to protections under the Agency Workers Regulations 2010.
Reduced contractor choice
Given the stricter rules that will soon apply in the sector, contractors may find fewer umbrellas willing or able to operate. This could result in limited choice and disruption to payroll.
What now?
If you are an agency or an end client, you will probably be wondering what you should do now in order to protect yourselves once the new rules come into effect.
1. Review all labour supply chains
Identify every umbrella company you use and get an idea of the chain so that you have a good idea of where the liability will fall. Take steps to make sure that no offshore or unvetted intermediaries exist.
2. Strengthen your due diligence processes
Carry out:
- Full compliance audits.
- Checks on PAYE operation, RTI (Real Time Information) submissions and payslips.
- Verification of the umbrella company’s structure, accreditation and financial stability.
As we mentioned earlier, even the most thorough checks will not remove liability, but they can help reduce exposure and show that you have got a system of responsible governance.
3. Time to update your contracts
The new rules are going to need a thorough review of your contracts in order to make sure they are compliant and fit for purpose. They should include clear obligations on umbrella companies to operate PAYE correctly, audit rights and access to payroll records. They should also include indemnity clauses – although it is worth remembering that HMRC can still pursue agencies/clients first.
4. Consider reducing umbrella reliance
We mentioned above the option of bringing workers onto your own payroll to simplify risk and compliance obligations.
5. Train HR, finance and talent teams
New rules mean new obligations, responsibilities and more for your teams to know. That means you will need to step up your training programmes to make sure that everyone gets the knowledge they need. Your teams will need to be aware of and understand:
- The new position on automatic liability.
- How to identify potential noncompliance.
- How to engage compliant umbrella companies.
If you have a tax adviser, see if they can arrange training that is fully regulatorily compliant and fit for purpose. Be careful about who you choose and make sure that they are qualified to deliver that training.
