HMRC confirms joint PAYE liability for agencies in new umbrella rules from 2026

In a policy paper, HMRC has confirmed that, from April 2026, recruitment agencies – not just umbrella companies – will be liable for unpaid payroll taxes.

The document – Umbrella company market – changes to Income Tax rules to tackle non-compliance – confirms that recruitment agencies and, in some cases, end clients will carry joint and several liability for unpaid PAYE and National Insurance where an umbrella company sits in the supply chain.

This follows on from the draft legislation and earlier announcements covered in our articles Umbrella tax reform: agencies and clients to face PAYE liability from 2026 and HMRC’s umbrella tax liability shift: why IT recruitment agencies face new financial risk.

What has HMRC confirmed this time?

The new paper sits alongside the draft Finance Bill 2025–26 provisions and confirms several key points:

• Umbrella companies remain employment intermediaries and the PAYE employer in the standard model, but they are no longer the only party potentially liable for payroll taxes where things go wrong.
• Where a worker is supplied via an umbrella company and there is a UK recruitment agency in the chain, the agency will generally be the party that HMRC can pursue for any PAYE and Class 1 NIC shortfall.
• If there is no agency, the end client takes on that liability instead.
• The change will be implemented through a new Chapter 11 of Part 2 ITEPA 2003, backed up by secondary legislation to create an equivalent joint and several liability for NIC purposes.
• The operative date is 6 April 2026, subject to the Finance Bill 2025–26 passing in the usual way.

HMRC is very clear that this is a tax compliance measure, not full regulation of umbrella companies.

A separate regulatory regime is still pencilled in for 2027. For a deeper look at how joint and several liability is expected to work in practice, in this article: Umbrella company reform 2026: what ‘joint and several liability’ means.

Who is likely to be affected?

The government estimates that around 700,000 individuals currently work via umbrella companies, supported by roughly 30,000 recruitment agencies and about 400 umbrella providers of varying size.

HMRC’s view is that many umbrellas operate compliantly. However, a persistent unsrupulous minority are linked to tax avoidance and organised fraud, including so-called mini-umbrella models.

The new regime is therefore aimed squarely at the businesses that choose which umbrellas sit in their supply chains.

HMRC argues that agencies and end clients are best placed to block non-compliant operators from the market and should bear legal responsibility if they ignore warning signs.

How joint and several liability will work

Under the draft rules, joint and several liability allows HMRC to go after the agency, or in some cases the end client, for any PAYE and NIC that a non-compliant umbrella failed to pay.

• HMRC can still assess the umbrella company first. The umbrella remains the employer on paper and should be operating PAYE under the normal rules.
• If the umbrella collapses, disappears, or simply does not pay over the deductions it has taken from workers, HMRC can transfer the debt up the chain.
• Where there is a UK recruitment agency between the client and the umbrella, that agency normally becomes the “relevant party” for enforcement purposes.
• If the client contracts directly with the umbrella, or the agency is offshore or connected to the umbrella, the end client may instead be exposed.

The policy paper also makes it clear that some agencies or clients may decide to run their own payroll rather than use umbrellas at all. In those cases, contractors might find themselves treated as agency “limb (b)” workers, with rights under the Employment Agencies Act and the Agency Workers Regulations.

Why HMRC is doing this

HMRC sets out three main policy objectives in the paper:

• To reduce tax losses created by fraudulent umbrella arrangements and mini-umbrella company fraud, which HMRC says divert significant sums away from the Exchequer.
• To stop workers being hit with large, unexpected Income Tax and NIC bills where umbrellas have deducted money from pay but not passed it on to HMRC.
• To level the playing field so that compliant umbrellas and agencies are not undercut by operators that bend the rules.

The Exchequer impact table in the policy paper points to a sizeable yield, particularly in the early years of the reform, which underlines how seriously HMRC views non-compliance in this part of the labour market.

What this means for umbrella company contractors

For individual contractors working via an umbrella, the key point is that HMRC wants liability to sit with the supply chain rather than the worker.

In theory, that should reduce the risk of being dragged into retrospective tax disputes where an umbrella has gone bad.

However, there are some practical consequences to watch for:

• Agencies may rationalise their umbrella panels and cut ties with providers they see as higher risk.
• Some clients may instruct agencies to move workers onto the agency’s own payroll, reducing the number of umbrella options available.
• Rate negotiations may become more complicated where agencies factor in the cost of extra compliance work and potential JSL exposure.

If you already use an umbrella company, it is worth asking your agency how they plan to respond to the new rules and whether they expect any changes to the way you are engaged in the run-up to April 2026.

Why recruitment agencies now face greater financial risk

For IT recruitment agencies, this policy paper confirms what has been signposted for some time: you can no longer assume that outsourcing payroll to an umbrella company insulates you from financial risk.

Our earlier piece, HMRC’s umbrella tax liability shift: why IT recruitment agencies face new financial risk, looked at how Chapter 11 interacts with existing agency legislation and why “turning a blind eye” to dubious umbrella models is no longer an option.

Given the confirmation provided by this latest HMRC paper, here are some steps agencies should be taking right now:

• Reviewing current relationships with umbrella providers and only working in the future with companies that can demonstrate very robust compliance.
• Ensuring umbrella agreements include explicit rights for the agency to receive regular PAYE evidence, obtain RTI reporting data, and conduct audit checks when required.
• Stress-testing their own exposure in scenarios where an umbrella fails to pay what it owes, and making sure any risks are understood by everyone at board level.

What about the planned reform of the umbrella industry?

The November 2025 policy paper is part of a longer process. HMRC has already consulted on tackling non-compliance in the umbrella company market and published a government response confirming that a JSL model was the preferred route.

These new Income Tax and NIC rules are due to take effect from 6 April 2026. Regulation of the umbrella sector itself is expected to follow in 2027, bringing separate employment-rights and standards questions into play.

In the meantime, tax risk is being pushed up the supply chain.

For contractors, agencies and end clients in the IT sector, the message is clear: the days of treating umbrella choice as a box-ticking exercise are over. The latest HMRC paper confirms that the financial consequences of getting it wrong will sit squarely with the businesses that decide which umbrellas they work with.

We will update our guides as the Finance Bill 2025–26 progresses through Parliament and the final legislation is agreed. For now, you can read the full policy paper on GOV.UK here: Umbrella company market – changes to Income Tax rules to tackle non-compliance.