Since 6 April 2026, where a worker is supplied through an umbrella company, responsibility for accounting for PAYE sits with the recruitment agency in the chain rather than with the umbrella. Where there is no agency, or the agency is offshore, the end client picks it up. The umbrella can still run the payroll. What it can no longer do is be the only party on the hook when the tax is not paid.
For agencies this is the most consequential tax change in a decade, and the exposure is not capped by the margin earned on the assignment. It is the full PAYE and National Insurance liability on the worker's pay.
What the Rules Actually Do
The measure was announced at the Budget in October 2024 and legislated in Finance Bill 2025-26, inserting a new Chapter 11 into ITEPA 2003. It applies to payments made on or after 6 April 2026 for services performed by umbrella company workers. Equivalent provision was made for National Insurance through social security legislation.
The policy intent is stated plainly in HMRC's own material: make the parties who can actually control a labour supply chain legally responsible for ensuring PAYE is properly accounted for. The target is the umbrella market's persistent non-compliance, particularly disguised remuneration schemes where only part of a worker's pay is run through PAYE.
Who Becomes Responsible
The responsibility lands on the employment business that has the contract with the end client. Where a chain contains several agencies, it is the one closest to the client. Where there is no agency at all, or where the agency is outside the UK or connected to the umbrella, responsibility moves to the end client.
What the Umbrella Still Does
Umbrella companies retain their employer reference numbers and can continue to employ and pay workers through their own PAYE payrolls. Nothing prevents that. The change is that their failure is now somebody else's liability as well as their own.
Why This Is Different From IR35
Agencies that survived the off-payroll reforms sometimes assume they have already solved this. They have not, and the differences matter.
- Off-payroll working is about status determination. This is not. There is no test to apply and no determination to make.
- Off-payroll liability attaches to a wrong answer. This attaches to somebody else's failure to pay, whatever you concluded about anything.
- Off-payroll applies to personal service company engagements. This applies to umbrella employment, which is a much larger share of most temp books.
An agency can have flawless status processes and still inherit a six-figure PAYE liability because an umbrella it used two years ago operated a scheme.
The Practical Liability Checklist
The following is the work that actually reduces exposure, in the order it is worth doing.
1. Know Every Umbrella in Your Chain
Not the preferred supplier list. The actual list, built from payment records rather than from policy. Most agencies discover names on it that nobody authorised, usually because a worker asked to use a particular provider and a consultant agreed.
2. Close the Chain
Move to a contractually enforced preferred supplier list with onward sub-contracting prohibited without written consent. An open chain is an uninsurable chain.
3. Get the Data, Not the Assurance
Ask for evidence rather than confirmations. Real-time information submissions, reconciliations between what you paid the umbrella and what the worker received, payslip samples, and evidence that the amounts run through PAYE match the amounts paid across.
4. Reconcile Margins Against Reality
Arithmetic is the best detection tool available. If the assignment rate, less the stated margin, less employer costs, cannot produce the worker's net pay, something is wrong. Rates that look impossibly good for the worker are the clearest signal of a scheme.
5. Watch the Specific Warning Signs
HMRC publishes guidance on reducing the risk of using an umbrella that operates avoidance. The recurring pattern is pay split so that only part is subject to PAYE, with the remainder described as a loan, an advance, an annuity, a grant or a non-taxable allowance. Any structure where a portion of pay is characterised as non-taxable deserves immediate scrutiny.
6. Document the Diligence
Keep dated records of what you asked, what you received and what you concluded. Where liability is in dispute, the difference between an agency that checked and an agency that assumed is evidential.
7. Reprice
Agencies carrying a new tax risk on every umbrella placement need that reflected in margin. Many have not yet passed it through, which means they are absorbing a liability they are not being paid for.
The Option Worth Modelling
A number of agencies have responded by bringing temporary workers onto their own PAYE payroll, or by moving to a single umbrella they audit intensively. Both reduce the surface area considerably.
Direct engagement is operationally heavier and changes your cost base, but it removes the category of risk entirely. Consolidating to one audited provider is lighter to implement while leaving concentration risk in place. The right answer depends on volume, sector and margin, and it is a modelling exercise rather than a matter of principle. What is no longer defensible is an unexamined chain of twenty providers nobody has reviewed.
Where It Interacts With Everything Else
April 2026 was not an isolated event. The Fair Work Agency was established in the same month with powers to inspect employers, require remedies and prosecute. From 1 October 2026, the right to work scheme extends to workers engaged under a worker's contract and to individual sub-contractors, with liability similarly running up contractual chains.
Read together, the pattern is unmistakable. Tax, labour standards and immigration have all moved in the same direction within a single year, and all three now expect the organisation that controls the chain to be able to see inside it. Agencies that build one supply chain assurance capability can serve all three regimes with the same evidence. Agencies that respond to each separately will do the work three times and still have gaps.
Frequently Asked Questions
Does This Apply to Workers We Place Through a PSC?
No. These rules concern umbrella company employment. Personal service company engagements remain governed by the off-payroll working rules, which are a separate regime with a separate test.
If the Umbrella Pays the PAYE Correctly, Do We Have Any Liability?
Where PAYE is correctly operated and accounted for, there is nothing outstanding to be liable for. The exposure arises from shortfall. This is why reconciliation, rather than assurance, is the control that matters.
Can We Contract Out of This?
You cannot contract out of a statutory liability to HMRC. An indemnity may give you a claim against a counterparty, but it does not remove the liability, and a provider operating a scheme is rarely good for the money.
What If the Umbrella Is Offshore?
Offshore arrangements are treated specifically, and responsibility can move to the end client where the agency is outside the UK. Separate rules for offshore intermediaries can also apply. This is an area to take advice on rather than infer.
How Far Back Can HMRC Look?
The new responsibility applies to payments made on or after 6 April 2026. Historic arrangements are governed by the rules in force at the time, which does not mean they are safe. Where an umbrella operated a scheme, other provisions may already have applied to the chain.
The Uncomfortable Summary
Agencies are now, in substance, guarantors of the tax affairs of businesses they do not own and frequently do not examine. The only meaningful response is to reduce the number of those businesses, obtain real data from the ones that remain, and document the process well enough to show what you did and when.
The providers who cannot supply reconciliation data are, with rare exceptions, the ones you most need to remove.
This article is general information about tax legislation, not tax or legal advice. Take specialist advice on your own supply chain and contracts.
Sources
HMRC. PAYE Rules for Labour Supply Chains That Include Umbrella Companies From 6 April 2026.
https://www.gov.uk/guidance/paye-rules-for-labour-supply-chains-that-include-umbrella-companies-from-6-april-2026
HMRC. Employment Status Manual ESM2405: Umbrella Companies Legislation, Chapter 11 ITEPA 2003.
https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm2405
HM Treasury. PAYE Changes for the Umbrella Company Market.
https://www.gov.uk/government/publications/paye-changes-for-the-umbrella-company-market
HMRC. Responsibilities for Employment Businesses Working With Umbrella Companies.
https://www.gov.uk/guidance/responsibilities-for-employment-businesses-working-with-umbrella-companies
The Stationery Office. Border Security, Asylum and Immigration Act 2025, Section 48.
https://www.legislation.gov.uk/ukpga/2025/31/section/48
Fair Work Agency. About the Fair Work Agency.
https://www.gov.uk/government/organisations/fair-work-agency/about
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