Umbrella companies are employment intermediaries, often used by recruitment agencies to employ and operate the payroll for workers whose services are then provided via the agency to an end-client business. This is common practice, providing agencies with the valuable benefit of administrative convenience.
This measure introduces draft legislation to make recruitment agencies or end-clients accountable for Pay As You Earn (PAYE) on payments where the umbrella company they're supplied through fails to meet their obligations.
Umbrella Companies: tackling non-compliance in the umbrella company market - GOV.UK
Draft Finance Bill Measures
The purpose of the new umbrella company legislation is three-fold:
- To clamp down on non-compliance and tax avoidance
- To protect workers from unexpected tax demands from HMRC
- Create a level playing field for legitimate, compliant suppliers
The measure is expected to reduce non-compliance in the umbrella market by preventing non-compliant companies from being given access to the market by encouraging increased due diligence by those that use them to engage workers on their behalf.
What's changing?
The draft legislation, to be introduced in the Finance Bill 2025/2026 as a new Chapter 11 within Part 2 of ITEPA 2003, will make employment agencies or end-clients joint and severally liable for any amount required to be accounted for under the PAYE provisions where an umbrella company forms part of the labour supply chain.
The new legislation provides a much welcomed legal definition of ‘umbrella company’ which will help to close ‘loopholes’ and see an intended end to non-compliant ‘mini-umbrella’ arrangements.
Further legislation will be introduced to provide HM Treasury with the power to make regulations imposing an equivalent joint and several liability for National Insurance Contributions (NIC) purposes.
What's staying the same
It's key to note that engagements with workers who provide their services through their own personal services company (PSC), eg, their own limited company, won't be in scope of these rules and these arrangements will continue to be subject to the ‘IR35’ off-payroll working (OPW) rules.
Who will it effect?
This change in legislation will enable HMRC to pursue an agency in the first instance for any payroll taxes that a non-compliant umbrella company fails to remit to HMRC on its behalf in respect of payments made to workers.
Key to this is where an end-client contracts directly with the umbrella company, it will be the end-client that's liable for any unpaid PAYE or NICs.
What does it mean for end-clients?
If you or your client engages individual workers via umbrella companies directly, from April 2026 you or they could be liable for any PAYE/NICs that an umbrella company fails to operate on payments made to workers.
Where there's an agency or multiples agencies, as can often be the case within the labour supply chain, the new rules will see the agency closest to the end-client business as being liable for any unpaid PAYE/NICs.
With the changes being less than eight months away, perhaps the key question to ask yourself or your client is do you or they have a strong understanding of labour supply chains? Do you or they have clarity on any umbrella companies and are those umbrella companies compliant? Ultimately, will the business be at risk?
Similarly to the changes introduced to the IR35/OPW rules in 2017 for public sector bodies and 2021 for medium/large private sector businesses, the umbrella company rules will impose a responsibility up the contractual chain to ‘police’ PAYE/NICs within labour supply chains.
Despite a possible sense of reduced ‘noise’ surrounding IR35/OPW in more recent years, while HMRC undertake compliance and data collation exercises, we're seeing a perhaps slow, but steady, increase in HMRC now following up with clients and the opening of new OPW/IR35 enquiries.
With this increase in HMRC activity coupled with the new umbrella company legislation, now is the opportune time for businesses to focus on their supply chains. By increasing awareness among internal personnel and completing robust and enhanced due diligence on labour supply chains, potential areas of weakness can be identified and measures taken to address these to protect both the risk profile and reputation of the business. This is especially relevant for businesses that engage directly with umbrella companies and/or engage with individuals that operate via their own PSC.
Understanding all relevant parties within a labour supply chain and the nature in which the services are being provided is crucially important.
What should end-clients do next?
It has only been days since the draft legislation landed, though it has been met positively within the labour supply sector with no surprises, and it still needs to go through further parliamentary stages and receive royal assent to become law in April 2026. For the end-client, the new legislation does generate additional responsibilities which could be both time-consuming and costly.
Time will tell the impact that the new regime might have on the labour market. Will there be an increased trend back towards engagements with PSCs or a revival in engagements with sole traders, for example? If so, this move would also see wider considerations for businesses within the construction industry scheme (CIS).
There are many steps that businesses can take to introduce new, or enhance existing OPW policies and processes and now is the time to take action by
- reviewing contracts with agencies and umbrella companies to provide assurance for the business
- completing a review of existing suppliers to ensure they're compliant
- enhancing the level of due diligence undertaken
- ensuring that personnel with responsibility for sourcing labour are appropriately trained on perform checks.
For more insight and guidance, get in touch with Mike Herdman and Tonia Danez.
