From 6 April 2026, new PAYE rules will apply to labour supply chains involving umbrella companies. HMRC’s changes are designed to close gaps in tax compliance and to combat avoidance arrangements where workers are engaged through umbrella companies but PAYE is not operated correctly.
The current HMRC guidance reflects draft legislation and may be amended before Royal Assent; HMRC has indicated it will update its guidance if the draft changes.
What this article is about: This article explains HMRC’s forthcoming PAYE rules for umbrella companies and the wider supply chain. It sets out how the new rules affect umbrella companies, recruitment agencies, and end clients, including the introduction of joint and several liability for underpaid PAYE. It also addresses the specific implications for SMEs that rely on contingent labour, offering practical guidance on how to prepare before the changes take effect. The article is written for employers, HR and finance directors, and recruitment agencies who need a clear understanding of their compliance responsibilities from April 2026. While HMRC’s enforcement focus is tax/NIC compliance under PAYE, we also flag connected employment law considerations (e.g., NMW and holiday pay) that SMEs should monitor as part of broader supplier due diligence.
Section A: HMRC’s New PAYE Rules
The forthcoming changes represent a significant shift in how PAYE liability is allocated in labour supply chains that involve umbrella companies. At present, the umbrella company is the employer and therefore responsible for operating PAYE on the payments made to its workers. From 6 April 2026, HMRC will introduce new rules under Chapter 11 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), supported by detailed guidance in the Employment Status Manual (ESM2400–ESM2440). These provisions expand the responsibility for ensuring PAYE compliance to include agencies and end clients. The legislation is currently in draft form and may be subject to amendment before it takes effect; HMRC has indicated it will update guidance if changes occur.
1. Overview of the Legislative Changes
The new rules create a framework where recruitment agencies contracting with end clients will be accountable for ensuring PAYE is correctly operated on payments made to workers supplied through umbrella companies. If no agency is involved, the liability shifts to the end client. HMRC has also introduced measures to tackle non-compliant or “purported” umbrella companies, ensuring disguised remuneration or rebadged employment models cannot escape PAYE deductions. This widens accountability through the chain while preserving the umbrella’s position as employer for PAYE operation.
2. Effective Date and Scope of Rules
The new legislation applies to all payments made on or after 6 April 2026 where workers are supplied through umbrella companies. Payments made before that date remain outside the scope of the new regime. The rules apply regardless of whether the umbrella company is UK-based, meaning that non-UK entities within supply chains can still bring UK agencies and end clients into scope. Where multiple intermediaries exist, the agency with the direct contractual relationship with the end client is the one referenced for accountability within this framework.
3. Purpose of the Changes
The rationale for the reform is to strengthen PAYE compliance and reduce the tax gap caused by avoidance or non-compliance in umbrella arrangements. HMRC has identified repeated issues with disguised remuneration, offshore schemes, and non-payment of PAYE liabilities by umbrella companies. By introducing joint and several liability for agencies and, where applicable, end clients, HMRC aims to improve accountability and ensure that all tax due is collected in full and on time.
Section Summary: The new PAYE rules create joint liability between umbrella companies, recruitment agencies, and end clients. They take effect for payments made on or after 6 April 2026 and aim to strengthen tax compliance across the labour supply chain by preventing avoidance and ensuring PAYE is properly operated. The legislative package is currently in draft and may be refined before commencement.
Section B: Scope of Liability
The key question for employers and agencies is who will be liable if PAYE is not correctly operated in an umbrella supply chain. HMRC’s new framework makes clear that liability will no longer rest solely with the umbrella company. Instead, liability will extend to the recruitment agency or, where no agency is involved, to the end client.
1. Responsibilities of Umbrella Companies
Umbrella companies remain the direct employers of workers and therefore retain the obligation to operate PAYE on wages. This includes deducting income tax, employee NICs, and student loan repayments, and accounting for employer NICs. Umbrellas must also report payments through Real Time Information (RTI). In addition to PAYE obligations, umbrella companies are also required to comply with wider employment law requirements such as National Minimum Wage and holiday pay. While HMRC’s enforcement role is focused on PAYE, SMEs and agencies should be mindful of employment law compliance as part of their due diligence.
2. Primary Liability of Recruitment Agencies
Where an umbrella company is engaged through a recruitment agency, the agency with the direct contractual relationship with the end client will be primarily responsible for ensuring PAYE is accounted for. If the umbrella fails to deduct or pay PAYE, HMRC may pursue this agency for the unpaid amounts, regardless of whether the agency itself handled the payroll.
3. End Client Liability in Absence of Agencies
In situations where no agency is present, the liability passes to the end client. For example, if a business contracts directly with an umbrella company to provide temporary staff, the business will be held responsible if the umbrella defaults on its PAYE obligations. This ensures that PAYE liabilities cannot fall through gaps in contractual chains.
4. Joint and Several Liability Explained
The rules establish joint and several liability, allowing HMRC to recover the full amount of unpaid PAYE from either the umbrella, the agency, or the end client. This means that even compliant parties may be pursued for debts caused by another party’s non-compliance. HMRC has confirmed it will use reasonable judgement to apportion liability where multiple agencies are involved in a supply chain, but ultimately it has the power to recover the full liability from any single accountable party.
5. Cross-Border Supply Chains
Where part of the supply chain is based overseas, liability will still attach to the closest UK entity in the chain. This ensures that HMRC can always identify a party within the UK to hold accountable. End clients engaging overseas umbrellas or agencies must therefore take particular care to ensure compliance, as they may face increased exposure under the new rules.
Section Summary: The new PAYE rules create a system where umbrella companies, agencies, and end clients may all be held liable for underpaid PAYE. Umbrellas remain responsible as employers, but agencies and end clients can now be pursued directly by HMRC. This shift significantly raises the compliance risks for all parties in labour supply chains, including those contracting with overseas entities.
Section C: Compliance Requirements and Anti-Avoidance
The reforms do not just widen the scope of liability; they also introduce detailed compliance obligations and anti-avoidance measures. HMRC has recognised that labour supply chains can be used to facilitate schemes designed to avoid or disguise PAYE liabilities, and the new rules are designed to close these gaps.
1. HMRC’s Definition of Umbrella Companies
An umbrella company is defined as a business that employs workers and supplies their services to end clients, usually through an agency. To qualify as an umbrella, the company must employ the worker under a contract of employment and operate PAYE on their wages. Companies where the worker has a material interest—for example, shareholding control—are excluded from being treated as umbrellas for these purposes, as are personal service companies and managed service companies, which are subject to separate tax regimes. In addition to PAYE duties, umbrellas must comply with wider employment law obligations such as National Minimum Wage and holiday pay, though HMRC’s enforcement remit remains focused on tax compliance.
2. Purported Umbrella Companies and Anti-Avoidance Measures
To prevent abuse, the rules also cover purported umbrella companies. These are entities that present themselves as employers but fail to treat workers as employees for PAYE purposes. If parties to the arrangement reasonably believe they are dealing with an umbrella employer, but that entity fails to account for PAYE, HMRC can treat it as if it were an umbrella company and apply joint and several liability. This measure is aimed squarely at schemes such as loan arrangements or rebadged employment models designed to reduce tax.
3. Information-Sharing Obligations
Umbrella companies will be expected to provide recruitment agencies and end clients with sufficient information to evidence PAYE compliance. This may include payroll records, gross-to-net calculations, and RTI submission data. Agencies and end clients are expected to request and retain this information as part of their due diligence processes. HMRC expects businesses to take reasonable steps to verify compliance rather than providing absolute assurance, but the burden remains on agencies and end clients to demonstrate they acted responsibly.
4. HMRC’s Enforcement Powers
HMRC will have the authority to raise assessments directly against any liable party within the chain. This includes the power to recover unpaid PAYE, interest, and penalties. Where multiple agencies are involved and accurate data is not available, HMRC may use its reasonable judgement to apportion liability or to pursue a single entity for the full amount. The presence of anti-avoidance provisions ensures that non-compliant umbrellas cannot shield end clients and agencies from liability.
Section Summary: The compliance framework is built on a strict definition of umbrella companies, expanded to cover “purported” umbrellas where avoidance is suspected. Agencies and end clients will need to maintain visibility of PAYE processes through information-sharing, while HMRC will retain wide powers to enforce liabilities across the supply chain.
Section D: Preparing for April 2026
With the rules taking effect from 6 April 2026, agencies and end clients have a clear window of time to prepare. Failing to act before the implementation date could expose businesses to significant financial and reputational risks if umbrella companies in their supply chain are non-compliant.
1. Supply Chain Mapping
The first step is to gain visibility over existing supply chains. Employers should map out all labour supply arrangements and identify where umbrella companies are being used. This exercise should also capture any cross-border relationships, as liability will still attach to the UK entity closest to the umbrella in the chain.
2. Due Diligence Checks and Contractual Protections
Agencies and end clients should update onboarding and monitoring processes for umbrella companies. This means requesting evidence of PAYE compliance, such as RTI submissions, payroll records, and gross-to-net pay calculations. Contracts with agencies and umbrellas should include:
- audit rights to inspect payroll records
- indemnity clauses for unpaid PAYE
- obligations to share information and co-operate with compliance checks
HMRC expects businesses to take reasonable steps to verify this information. While absolute certainty may not always be achievable, failing to conduct basic checks could leave agencies or end clients directly liable.
3. Payroll Verification and RTI Reporting
Agencies and end clients should require umbrellas to demonstrate that PAYE and NICs are properly calculated and reported. This involves checking gross-to-net methodologies, confirming that employment law requirements such as holiday pay are being met, and ensuring that RTI submissions align with contractual arrangements. Where irregularities are detected, businesses should act quickly to address them or consider alternative suppliers.
4. Risk Management and Cashflow Planning
The introduction of joint and several liability means agencies and end clients may be pursued for debts caused by third parties. Businesses should therefore review their financial planning and risk management strategies to ensure they can withstand an unexpected HMRC assessment. This may involve ring-fencing funds, reviewing insurance cover, and stress-testing potential exposure.
Section Summary: Preparation ahead of April 2026 requires a structured approach: mapping supply chains, enhancing due diligence, securing strong contractual protections, and stress-testing financial exposure. Agencies and end clients who take early action will be better positioned to manage the risks associated with umbrella company non-compliance.
Section E: What Does This Mean for Me? (SME Perspective)
For small and medium-sized enterprises (SMEs), the introduction of joint and several liability for PAYE represents a substantial shift in compliance responsibility. Many SMEs rely on recruitment agencies and umbrella companies to meet short-term staffing needs. From April 2026, however, those businesses may face direct exposure if any party in the chain fails to operate PAYE correctly.
1. Increased Responsibility for Compliance
SMEs that use contingent workers via agencies may find themselves drawn into HMRC enforcement action, even if they never contracted directly with the umbrella company. Joint and several liability means HMRC can pursue the SME for the full amount of unpaid tax and NICs if an umbrella or agency defaults.
2. Supply Chain Transparency and Tighter Controls
For SMEs, compliance will hinge on transparency. Smaller businesses must ensure they know who is employing their workers and that PAYE is being correctly applied. This may require more rigorous checks on agencies and a willingness to demand payroll evidence and assurance from umbrella providers.
3. Cost and Cashflow Implications
Unexpected PAYE liabilities could be damaging for SMEs, where cashflow flexibility is limited. An HMRC assessment following an umbrella’s default could significantly affect working capital. Businesses will need to factor this exposure into their financial planning and risk assessment.
4. Contractual Protections
SMEs should review and, where possible, renegotiate agreements with agencies to include indemnities, audit rights, and obligations for information-sharing. These contractual tools will help SMEs mitigate risk by ensuring they have recourse if a supplier fails to meet PAYE obligations.
5. Practical Steps for SMEs
- map their labour supply chains and identify any umbrella use
- select reputable agencies with clear compliance records
- demand visibility of umbrella PAYE processes, including RTI evidence
- train HR and finance staff to recognise non-compliant arrangements such as loan schemes
Section Summary: For SMEs, the 2026 PAYE reforms mean they must take greater ownership of compliance risks in labour supply chains. By enhancing supply chain transparency, strengthening contracts, and embedding compliance checks into HR and finance processes, SMEs can protect themselves against unexpected liabilities.
FAQs
What are the umbrella company PAYE rules from April 2026?
From 6 April 2026, recruitment agencies contracting with end clients, or the end clients themselves if no agency is involved, will be jointly and severally liable with umbrella companies for operating PAYE on payments to workers. The rules are set out in draft legislation under Chapter 11 ITEPA 2003 and supported by HMRC’s Employment Status Manual (ESM2400–ESM2440).
Who will be liable for PAYE in umbrella supply chains?
Liability primarily sits with the umbrella company as the employer. However, agencies with contracts with end clients, and end clients where no agency is used, will also be liable. HMRC can pursue any of these parties for underpaid PAYE.
Do the rules apply to non-UK umbrella companies?
Yes. Where part of the supply chain is overseas, liability falls to the closest UK entity, typically the agency or the end client. This ensures HMRC can always recover PAYE due within the UK.
How does joint and several liability work?
HMRC can recover the full amount of underpaid PAYE from any liable party within the chain, regardless of which party defaulted. Even compliant agencies or end clients may be pursued if another party fails to pay. HMRC has discretion to apportion liability across multiple agencies where appropriate but is not required to do so.
What due diligence is required from agencies, end clients, and SMEs?
HMRC expects agencies and end clients to take reasonable steps to verify compliance. This includes reviewing umbrella payroll records, seeking RTI submissions, including indemnities in contracts, and regularly auditing supply chain partners. SMEs, in particular, should embed these checks into their standard HR and finance processes.
Conclusion
The new PAYE rules for umbrella companies mark a major change in how HMRC enforces tax compliance in labour supply chains. From 6 April 2026, recruitment agencies and end clients will be jointly and severally liable with umbrella companies for ensuring PAYE is correctly operated. This shift closes long-standing gaps that have allowed non-compliant umbrellas to avoid their obligations and leaves agencies and end clients directly exposed if errors occur.
For HR and finance directors, the message is clear: supply chain compliance can no longer be outsourced or assumed. Agencies and SMEs must actively monitor umbrella company practices, demand transparency, and strengthen contractual protections. Early preparation—through mapping supply chains, performing due diligence, and embedding financial safeguards—will be critical to managing the risks of joint liability.
By acting now, businesses can reduce their exposure, maintain compliance, and ensure they are fully prepared for HMRC’s new enforcement framework when it takes effect.
Glossary
| PAYE | Pay As You Earn, the system under which income tax and National Insurance contributions are deducted from employees’ wages before payment. |
| Umbrella Company | A business that employs workers and supplies their services to end clients, usually via agencies, while operating PAYE on their wages. |
| Joint and Several Liability | A legal principle allowing HMRC to recover the full amount of unpaid PAYE from any one of the parties held liable, regardless of fault. |
| End Client | The organisation that ultimately receives the services of the worker in a labour supply chain. |
| Recruitment Agency | An intermediary that contracts with the end client to supply workers, often engaging umbrella companies as employers of record. |
| ITEPA 2003 | The Income Tax (Earnings and Pensions) Act 2003, which contains the legislation governing income tax and PAYE rules. |
Useful Links
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
