Umbrella tax reform: Agencies and clients to face PAYE liability from 2026

From 6th April 2026, the Government will shift liability for unpaid tax from non-compliant umbrella companies to recruitment agencies and end clients.

This significant change is designed to address fraud, tax evasion, and worker exploitation in the temporary labour market.

If an agency engages an umbrella company and that company fails to pay the correct tax, the agency will become jointly and severally liable.

Where no agency exists in the chain, the end client will bear the responsibility. HMRC states that this will require those who control labour supply chains to ensure that PAYE and NICs are correctly accounted for.

What’s changing?

• From April 2026, agencies (or clients) will be legally responsible for PAYE and NICs where a non-compliant umbrella company fails to pay.
• This new joint and several liability applies across umbrella arrangements in the supply chain.
• The measure is expected to prevent around £895 million in lost tax in its first full year.

Why is this being introduced?

While many umbrella firms operate responsibly, HMRC has identified widespread abuse involving some providers that misreport income, underpay taxes, or disappear altogether, leaving workers with unexpected bills and the Exchequer with significant losses.

The Government believes that agencies and clients are best placed to prevent this by carrying out proper checks. This policy is designed to create a direct financial incentive for them to do so.

Industry welcomes clarity

The move has been welcomed by leading industry bodies and compliance experts.

Dave Chaplin, CEO of ContractorCalculator told us:

The liability provisions are more brutal than the MSC or off-payroll IR35 rules, which contain debt transfer provisions. But the new umbrella rules mean that HMRC can go after any ‘relevant party’ interposed between the client and the worker.

To achieve certainty, and if possible, the easiest way to alleviate the risk would be for the ‘relevant party’ to pay the tax bill on behalf of the umbrella, leaving the umbrella to handle the rest.

Rebecca Seeley Harris, of Re Legal Consulting, told us:

“The new Chapter 11 should stop the ‘purported’ umbrellas in their tracks. This measure is aimed at those companies that abuse the position of the inside IR35 contractor. Although that doesn’t directly benefit the contractor, better compliance in the supply chain will.”

Ciaran Woodcock, commercial director at SG Umbrella, told us:

Compliant umbrella companies like SG umbrella have wanted these types of changes for years. For too long it’s been too easy for the non competitive models to thrive. The industry has made massive strides forwards in recent years with SafeRec doing real time audits and compliant umbrellas have embraced the opportunity to prove compliance.

Joint and Several liability means agencies need to see proof that each and every payslip has the accurate deductions made. My advice to agencies is given how relatively little it is for umbrella companies to provide these real time audit reports reports are, if your partners aren’t providing these to you then you need to rethink who you work with.

Sam Cox, Director of UmbrellaSure, commented:

“A dark cloud of uncertainty that has been hanging over the sector is starting to lift with this news… It offers reassurance to both umbrella companies and recruitment agencies – and is certainly the lesser of two evils.”

What about contractors?

Contractors can still operate via umbrella companies. This reform is not a ban – it targets non-compliant operators, not the model itself.

Fully compliant umbrellas should not be affected, although more rigorous checks by agencies are likely to become the norm.

Some agencies may also choose to bring payroll in-house to minimise exposure. Where that happens, contractors may be paid directly as agency workers, gaining certain statutory rights under UK employment law.

How will it be enforced?

The legislation will amend the Income Tax (Earnings and Pensions) Act 2003 to introduce joint and several liability under a new Chapter 11. HM Treasury will also gain the power to create matching rules for National Insurance through regulations.

HMRC will be able to pursue the agency (or client) in the first instance if a payroll failure occurs. The draft legislation is available now and will form part of the Finance Bill 2025–26.

Next steps

The new rules will take effect from 6th April 2026, subject to parliamentary approval.

This joint and several liability change comes ahead of a broader compliance crackdown, which is expected to precede the planned regulation of the umbrella sector in 2027.

Rogue operators are the primary target, but risk exposure is shifting up the supply chain, meaning even compliant businesses could inherit liabilities if their due diligence fails.

The concept of joint and several liability isn’t new; it already applies in areas such as off-payroll working and the Managed Service Company rules. However, this is the first time it’s being used to enforce umbrella company PAYE compliance.

For a deeper explanation of how liability will be assigned in different scenarios, see our earlier article:
Joint and Several Liability: What it means for umbrella supply chains.

Full policy and draft legislation:
Umbrella companies: Tackling non-compliance

Read Brookson MD Matt Fryer’s article on the new rules.

Excellent analysis from Osborne Clarke on what the rules may mean for the contracting industry.