After a long wait, the Government has finally published draft tax legislation aimed at alleviating non-compliance in the umbrella company market. These measures, outlined in the Finance Bill 2026, represent an important first step toward regulation of this part of the temporary labour market.
Recruitment agencies, end clients, umbrella companies, and contractors will all be impacted, but the main goal is to reduce non-compliance and protect these parties. Those working with compliant umbrella companies will remain unaffected providing they do their due diligence on the partners in their supply chain.
No surprises in the draft tax legislation
The draft legislation mirrored what had been widely speculated in the sector. Umbrella companies can continue to deduct and remit to HMRC, PAYE tax and National Insurance (NI) deductions under their own employer reference number.
And HMRC has proposed the introduction of a “joint and several liability” (JSL) approach In the context of an agency (or end-client) and umbrella company arrangement, this means that all parties involved are jointly responsible for ensuring PAYE and National Insurance deductions are correctly accounted for. And under the JSL framework, HMRC are empowered to recover any unpaid liabilities from either the umbrella company or the agency.
The proposal also includes a “strict liability” provision, under which any unpaid debts owed by the umbrella company could be recovered, without exception, from the agency closest to the end client in the labour supply chain, or from the end client itself if no agency is involved.
What are the main takeaways?
The draft legislation introduces several significant amendments and additions to the existing Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”) and the Social Security Contributions and Benefits Act 1992. Key proposals include:
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Where PAYE has not been correctly operated, liability will rest with the umbrella company and the agency that holds the contract with the end client for the supply of the worker, typically the top-tier agency or Managed Service Provider.
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If there is no agency involved in the supply chain, the liability will shift to the end client.
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In cases where neither the end client nor the agency contracting directly with the client is UK-resident, the liability for any unpaid umbrella company debt will fall to the closest UK-resident agency within the supply chain.
Additional key points
- For the first time, the term “umbrella companies” is formally defined in legislation. It refers broadly to a company that carries on a business of employing workers to personally provide their labour to end clients, where the worker does not hold a material interest in the company and specific “umbrella company arrangements” conditions are met.
- The umbrella company arrangements describe the contractual structure of the supply chain, such as an umbrella company contracting directly with an end client, or via an agency.
- Under the proposed framework, each “relevant party” alongside the umbrella company is jointly and severally liable for any shortfall in tax payments.
- The identity of the relevant party is defined in Section 61Z, primarily targeting the agency holding the contract with the end client, or, where no agency is present, the end client itself.
- A new concept of a “purported” umbrella company is introduced to close potential loopholes. This targets arrangements designed to avoid JSL provisions and ensures remuneration is treated as earnings from a deemed employment with the purported umbrella.
HMRC reinforces their intentions
HMRC have detailed their intentions behind these changes in notes alongside the draft proposals with the key influences being:
- Closing the tax gap by gaining the current loss from non-complaint umbrella companies
- Making taxes fairer
- Protecting the temporary workforce from unexpected tax bills caused by non-compliant umbrella companies
How can you prepare?
We have highlighted before how important It is to start preparing now for April 2026 by doing a couple of key things:
- Review your due diligence processes and internal procedures.
- Map out your full supply chain.
- Tighten your Preferred Supplier List (PSL) to focus on partners you trust.
- Reassess your contractual indemnities, and consider your PSL’s financial stability.
We know legislation is changing fast and we’re here to help make the process as smooth as possible. If you have questions or want support, just reach out to the team here.
Related article: Big changes are coming to the umbrella company market
In March 2025, the Government issued its response to the consultation on “Tackling Non-Compliance in the Umbrella Company Market.” It confirmed plans to adopt Option 3—placing tax responsibility on the employment business that supplies workers to end clients. While this move signals a significant policy shift, it has also introduced new ambiguity. The industry is now left grappling with a critical question: who will be in charge of fulfilling PAYE obligations?