Background: Why these reforms?
Umbrella companies have long been used in labour supply chains but also abused in cases of tax fraud and non-compliance. To protect workers and ensure tax fairness, HMRC introduced new rules in April 2026 to assign responsibility not just to the umbrella company, but also to the agency or end client, where applicable. (gov.uk)
What is joint and several liability?
Under the new Chapter 11, Part 2 of Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), when an umbrella company forms part of your labour supply chain:
- If the umbrella company fails to pay PAYE, HMRC can recover the unpaid tax from any relevant party—including the recruitment agency or the end client. (gov.uk)
- Liability kicks in from payments made on or after 6 April 2026. (gov.uk)
Who is affected?
- Umbrella companies themselves remain responsible for operating PAYE correctly for their employees.
- Agencies with direct contracts to supply workers to clients are now accountable.
- End clients are responsible if there’s no recruitment agency in the chain—they contract directly. (gov.uk)
- Workers should check their payslips carefully for correct deductions. Easy prompt: get itemised pay statement, compare employer, NI, tax lines.
What this means in practice
- If an umbrella company doesn’t remit PAYE, HMRC can ask the agency or the client (if there's no agency) for the payment.
- Both agencies and clients must carry out due diligence before engaging with umbrella companies—review financial compliance, ensure payroll systems are robust.
- Contracts may need updating to mirror these obligations. Clauses transferring liability or indemnifying could help, but ability to enforce depends on legal terms.
Examples
Scenario 1: Agency A supplies workers through Umbrella Company U to Client C. U fails to pay £30,000 of PAYE. HMRC can approach both A and C for that amount, as A holds the contract with C. Scenario 2: Worker contracts directly with U (no agency), but Client C pays U. If U fails, then Client C becomes liable.
Tips to manage risk
- Audit umbrella partners: check their PAYE history, company accounts, online reviews.
- Include safeguards in contracts, such as requirement of proof of PAYE submissions.
- Ensure payroll compliance throughout the supply chain.
- Workers should monitor pay statements, keep records of earnings, deductions.
Where IR35 fits in
These umbrella reforms are separate from IR35, which deals with off-payroll working rules for intermediaries like PSCs. If you are caught by IR35, those rules still apply, but the umbrella reforms concern operating PAYE obligations across labour supply chains.
Summary
- Effective 6 April 2026, agencies and clients may be liable for PAYE in the supply chain.
- Compliance requires due diligence, contract reviews, accurate record keeping.
- Aim: more fairness, less abuse, better protection for temporary workers.