Umbrella company reforms 2026: What businesses need to know

New legislation for businesses who engage off-payroll workers through umbrella company arrangements can make recruitment agencies and, in some cases, end clients jointly and severally liable for PAYE where an umbrella company fails to meet its tax obligations.

Such arrangements have been a continued focus for HMRC and this tightened approach evidences its intention to encourage greater labour supply chain due diligence and review of associated governance as well as accountability.

Following the introduction of the Fair Work Agency from April 2026, businesses need to ensure that their labour supply chains are able to stand up to the potential for more rigorous audit. HMRC’s real‑time data monitoring and increased scrutiny of umbrella arrangements indicates that compliance interventions may accelerate once the rules take effect.

What is an umbrella company?

This is defined on a broad basis and covers any business supplying labour under a contract of employment, which may therefore capture employers of record and outsourced employment structures in some cases. There are also anti-avoidance provisions which brings in engagement arrangements which resemble umbrella companies, even where they do not employ the workers.

What is changing from 6 April 2026?

From 6 April 2026, umbrella companies and a “relevant party” become jointly and severally liable for PAYE where an umbrella company sits in a labour supply chain.

This change is being imposed to combat cases where non-compliant umbrella companies deduct PAYE/NIC without remitting it to HMRC. The change will enable HMRC to pursue the relevant party directly when the umbrella company defaults on its obligations, starting with the agency directly above the delinquent umbrella company.

In cases such as this, where a worker is supplied by an agency, liability will generally sit with that agency, however where there is no agency between the end client and umbrella company, the liability will then pass up the labour supply chain to the end client. Things can be further complicated where there are offshore entities within a labour supply chain which may bring the onshore relevant party into scope.

What this means for businesses?

The reforms shift risk upwards in the supply chain. Even if an umbrella company continues to operate payroll, HMRC expects agencies and end clients to take responsibility for ensuring PAYE/NIC is correctly accounted for.

There is a clear requirement for end clients to ensure robust labour supply chain due diligence, however its completion does not of itself guarantee compliance. Organisations must therefore build a governance framework that evidences oversight, risk management, and proactive monitoring.

IR35/Off payroll working

There are deeming provisions which confirm that engagements with workers operating through their own personal service companies remain subject to the IR35/off payroll working rules and are not brought within the joint liability umbrella reforms.

Actions businesses should take now

With joint and several liability on the horizon, proactive preparation is essential. Recommended actions include:

• Identifying and understanding contingent labour in the supply chain
  • Identify all avenues for worker engagements, including the use of agencies, umbrella companies, employers of record, and any connected suppliers.
  • Consider whether there are any direct or sub-contracted arrangements offshore.
• Enhanced due diligence
  • Refresh the due diligence processes of engaging with suppliers, focusing on PAYE accuracy, payroll operation, RTI compliance, NIC treatment, application of agency rules and contractual arrangements.
• Monitoring and assurance
  • Require regular monitoring which may extend to checks of payslips, payroll calculations, and remittances to HMRC as well as compliance attestations from agencies and umbrella partners.
• Strengthening contractual protections
  • Update contracts to include the right to audit all entities in the labour supply chain, require information sharing, and provisions to permit suspension or termination where non or unclear compliance is identified.
  • Review contractual indemnities to understand where risks sit and consider enforcement from a legal perspective.
• Reassessing the engagement model
  • Consider whether a simpler or less varied supplier base may reduce risk or consider the movement of workers onto agency or in-house payrolls. This may include the use of trusted or accredited agencies.
  • Assess the employment status, agency rules, IR35 and worker rights implications before moving away from umbrella models.
• Training
  • Ensure hiring managers, procurement teams and those responsible for contingent labour understand the new rules and know how to identify risks.

How we can help

The April 2026 umbrella company reforms mark a significant shift in HMRC’s approach to labour supply chain compliance. As these changes approach, businesses should focus on building robust governance frameworks that demonstrate clear oversight and proactive monitoring.

With our extensive expertise and experience in advising organisations on employment tax risks, labour supply chain governance, and payroll compliance frameworks, our specialists can support with:

1. End-to-end supply chain review: We can map your labour supply chains and identify risk exposures under the new legislation, requiring attention.
2. Enhanced due diligence and governance design: We can design or update your due diligence processes, supplier questionnaires, onboarding frameworks, and standard monitoring controls to satisfy HMRC expectations.
3. Operating model assessment: We can help you evaluate whether alternative labour supply engagement models would better control risk, including agency only models or moving workers onto internal payroll.
4. Training for HR, procurement, finance and tax teams: We can deliver training sessions tailored to your organisation’s structure to ensure all internal stakeholders understand the new rules and how to apply them.

For further guidance, please contact Jonathan Berger or our Employer Solutions team.