Implications of the New Joint and Several Liability Rules for Umbrella Companies

The UK government has introduced draft legislation that imposes joint and several liability for unpaid PAYE income tax and Class 1 National Insurance Contributions (NICs) on umbrella companies and other parties in the labour supply chain. 

This new legislation is to apply from 6th April 2026 and is part of HMRC’s push to tackle non-compliance in the temporary labour market. Under the new rules, if an umbrella company fails to pay PAYE or Class 1 NICs, HMRC can pursue another party in the chain. What this means is that where the umbrella worker is provided by an agency HMRC can pursue the agency for any outstanding PAYE and NICs. Where there is no agency in the supply chain, the end-user will be liable for the full amount of any outstanding PAYE or Class1 NIC. This applies even in circumstances where neither the agency or, in the absence of an agency, the end-user was not directly responsible for the error or fraud.

HMRC estimates that 700,000 workers are engaged by umbrella companies and says “Many umbrella companies operate diligently, supporting their employees and providing convenience and administrative benefits for agencies. However, too many are used to facilitate non-compliance including tax avoidance and tax fraud. This incurs significant losses for taxpayers and can leave workers with unexpected tax bills. In addition to causing significant harm to workers and taxpayers, non-compliant umbrella companies undercut compliant firms, threatening the viability of those businesses that do the right thing, as well as the functioning of the market itself.” 

It is anticipated that some agencies (or end-client businesses) may decide to operate their own payroll, rather than contract with an umbrella company. In this case, individuals may see a change in the party paying them. If an agency decides to move a worker onto its own payroll rather than using an umbrella company, the worker may also see their employment status change to that of an agency ‘limb (b) worker’.

It doesn’t stop there, HMRC has also introduced the concept of a “purported” umbrella company. If an agency/end-user reasonably assumes an umbrella company employs the worker, yet in reality, the umbrella is not genuinely employing or paying the worker correctly, HMRC will deem the arrangement as employment for tax purposes. If this is the case, then the agency/end-user will be liable for any missing PAYE and NICs.

• Umbrella companies that employ and pay temporary workers.
• Recruitment agencies that contract with umbrella companies.
• End clients who engage workers directly through umbrella companies (where no agency is involved).

• Joint and several liability gives HMRC the ability to recover unpaid PAYE and NICs from any party in the supply chain—umbrella company, agency, or end client—regardless of fault.
• The rules apply to payments made on or after 6 April 2026. 

• Recruitment agencies (and end clients where there is no agency in the supply chain) will need to ensure that they have processes and policies in place governing their labour supply chains. It is vital that both agencies (and end clients) understand the whole labour supply chain.
• Due diligence will become critical: verifying the compliance status of umbrella companies will be essential to mitigate financial risk. How you do this will depend on the level of evidence you can obtain from the umbrella companies.
• The regime operates on a strict liability basis, meaning there is no statutory defence for parties held liable. What is clear from this is that even where assurance has been provided by the umbrella company in relation to the operation of PAYE/NIC there is no defence against unpaid liabilities being sought from the agency/end user, in the event that the umbrella has not paid over the correct PAYE/NIC.
• The mere fact that the umbrella failed to remit taxes is enough for HMRC to demand payment from the agency/end user.

Previously, you may have relied on:

• Preferred supplier lists (PSLs)
• Accreditation schemes
• Spot audits or payslip checks

Under the new rules, HMRC has made it clear that only direct payment of PAYE to HMRC under the umbrella’s reference neutralises the risk. 

Agencies/end users now face:

• Financial exposure: Potential liability for large tax debts.
• Reputational damage: Association with non-compliant umbrellas could harm brand trust.
• Legal scrutiny: Organisations may be subject to HMRC investigations even if they acted in good faith.

The new rules will apply to all organisations using workers provided by umbrella companies. Agencies and end-users are now seen as gatekeepers of compliance in the labour supply chain and must act accordingly.

With the new rules less than 6 months away, if you engage directly with umbrella companies, we can help you prepare for the new rules by 

• Reviewing your contracts with umbrella companies.
• Helping you implement robust compliance checks and audit trails.
• Putting in place processes to help you ensure that umbrellas are correctly calculating and remitting PAYE/NICs.
• Helping you to identify non-compliant or high-risk umbrella companies for you to remove from your supplier list.
• Check HMRC’s list of deliberate tax avoiders – this is updated on a regular basis.

For further guidance on any of the above please contact Caroline Jones, Head of Employment Taxes at [email protected]