Approaching the new umbrella legislation with caution – advice for our clients

Changes announced this summer mean that umbrella companies – those intermediary employers used to pay temporary workers – will no longer offer the risk‑free shield that many agencies and clients have relied on. Draft legislation published in July 2025 proposes to insert a new Chapter 11 into Part 2 of the Income Tax (Earnings and Pensions) Act 2003 .  From 6 April 2026 the rules would make recruitment agencies and, in some cases, the end client jointly and severally liable for any PAYE or National Insurance contributions (NICs) that an umbrella fails to hand over .

What the draft rules say

Under the government’s proposals, a payment made by an umbrella company to a worker becomes a “qualifying umbrella company payment” if there is a chain of contracts linking the umbrella, the agency and the end client .  Once that payment is made and a Real‑Time Information (RTI) return is submitted, the associated tax remains a debt owed to HMRC until it is actually received .  If the umbrella collapses or pockets the money, HMRC can collect the PAYE and NIC from “relevant parties” – meaning the agency immediately below the client or, in certain circumstances, the end client itself .  The government’s policy documents confirm that HMRC intends to pursue the agency or client first for any unpaid tax , and the draft legislation provides no statutory defence – reasonable care or due diligence is not enough .

This joint‑and‑several liability (JSL) concept is very different from IR35.  In the IR35 off‑payroll regime clients can control their risk through status determination statements and tax offsets introduced in April 2024; misclassification risk is now proportionate, and firms can manage it .  By contrast, JSL creates a systemic risk: if an umbrella fails, the liability can include the entire gross pay for all workers and cannot be avoided through audits or due diligence .

Why umbrellas will no longer be “risk‑free”

Many agencies and end clients have historically viewed umbrella companies as a way to outsource payroll compliance.  But the new proposals reverse that dynamic.  Key reasons why umbrellas become a source of risk:

• Loss of control – agencies and clients cannot see in real time whether PAYE has been paid.  Under the draft rules, tax becomes due when the worker is paid, but HMRC may not receive the money until the 22nd of the following month.  Until proof of payment is provided, upstream parties remain exposed.

• No defence for due diligence – the legislation has no statutory safe harbour.  Even if an agency conducts audits and supply‑chain assurance, it cannot rely on these as a defence if the umbrella defaults .

• Connected‑parties risk – if the agency or umbrella are connected (for example through common directors), liability can bounce back to the client without their knowledge.  HMRC can pursue the relevant party irrespective of whether the umbrella is UK‑resident .

• Scale of exposure – the liability covers all workers on the umbrella’s books.  For IR35, the tax risk is limited to the unpaid tax on that worker’s fees; for umbrellas, the exposure could be the entire payroll.

Likely market reaction

Commentators expect the market to shift dramatically when these rules take effect:

• Clients may abandon umbrellas – the safest approach for risk‑averse firms will be to avoid umbrellas entirely and instead use agency payroll or fixed‑term employment contracts .  This mirrors early reactions to IR35 when some businesses imposed blanket bans on outside‑IR35 contracting.

• Agencies may redesign payroll flows – one emerging solution is for agencies or clients to pay the workers’ net wages to the umbrella but remit PAYE/NIC directly to HMRC.  This restores control over the tax and removes JSL exposure.  However, it fundamentally changes the agency‑umbrella relationship and may require new processes and contracts .

• Umbrella companies must reinvent themselves – to survive, umbrellas will need to offer risk‑free models (for example, allowing agencies to pay tax directly, providing real‑time visibility of HMRC payments or offering insurance‑backed guarantees).  Without such assurances, umbrellas risk being sidelined.

Practical steps for our clients

Although the draft rules are not due to come into force until April 2026, the market is expected to adjust long before then.  The final legislation is likely to be published shortly after the Autumn Statement on 26 November 2025, with final details emerging in December 2025.  As your advisers, we recommend the following steps:

1. Map your labour supply chains – identify which parts of your workforce are engaged through umbrella arrangements.  Establish which agencies and umbrellas you work with and assess their compliance history.

2. Assess direct‑to‑HMRC options – explore whether paying PAYE/NIC directly to HMRC is viable.  This may involve reconfiguring payroll processes but provides the most robust protection.

3. Review contracts and due diligence procedures – update contracts with agencies and umbrellas to ensure you have access to real‑time payroll data and the right to audit.  Strengthen supply‑chain assurance protocols; regular checks of payslips alone will not suffice.

4. Prepare contingency plans – consider alternative engagement models such as agency payroll or fixed‑term employment for roles currently filled via umbrellas.  Ensure recruitment teams are aware of the potential costs of JSL and are prepared to pivot quickly .

5. Educate stakeholders – brief your HR, finance and procurement teams on the upcoming changes.  HMRC will expect agencies and end clients to understand their obligations and to take an active role in ensuring PAYE compliance .

6. Monitor legislative updates – the Finance Bill 2025‑26 will finalise these rules.  We will monitor the Autumn Statement and subsequent parliamentary debates and provide updates as soon as the position is clear.

Final thoughts

The government’s drive to tackle non‑compliance in the umbrella market is laudable, but the draft legislation takes a blunt approach that shifts risk to agencies and clients.  Unlike the IR35 reforms, where a risk‑based approach and tax offsets have made compliance manageable , the proposed umbrella rules offer no safe harbour and impose absolute liability .  For clients that have relied on umbrellas as a simple outsourcing solution, this represents a seismic change.

As your accountants, our priority is to help you navigate this evolving landscape.  We will continue to monitor developments and provide guidance.  In the meantime, please speak to us if you would like to review your existing supply chains or discuss the feasibility of direct‑to‑HMRC payroll models