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As part of the Autumn Budget 2025 the government has confirmed that from 6 April 2026 end clients will have an obligation to ensure that PAYE and NICs is being correctly operated on the earnings of workers engaged via umbrella companies.
Following a consultation paper in June 2023 and draft legislation in July 2025, these changes should come as no surprise to most businesses.
The new legislation requires businesses using umbrella companies to perform greater due diligence on their supply chains to ensure tax compliance. While well intended, this is likely to increase the compliance burden on businesses already feeling the strain.
What is an umbrella company, and what are the rules today?
An umbrella company is an intermediary that engages inpidual workers (typically as employees) to provide services to end clients, usually through an agency or employment business.
It generally manages administration relating to the engagement, and at present, is responsible for the correct operation of PAYE and NICs, allowing businesses to effectively outsource the employment tax risk.
How should end clients respond to the new law?
The new rules apply to all payments to workers on or after 6 April 2026. In practice, they mean that the ultimate responsibility for PAYE/NICs will move to the end client (unless there is a UK agency in the chain, in which case the buck stops with them).
HMRC will expect end clients be in a position to evidence robust controls over their labour supply chains. The coming months should be used to update processes and ensure contracts with agencies and umbrella companies are fit for purpose, for example by including indemnities to mitigate exposure.
Engagement across procurement, HR, tax, finance and operations departments will be important to ensure processes are consistent and well managed.
These rules sit alongside the existing "off payroll worker" rules, IR35 and other labour supply chain obligations (for example, the requirement to provide agency workers with information on vacancies and access to certain facilities). It is therefore advisable for businesses to integrate the new responsibility with their processes that cover contingent workers more generally, including employment status assessments, agency auditing/compliance checks and right to work procedures.
HMRC's updated best practice guidance for engaging with umbrella companies is available here.
For businesses with a high population of umbrella workers more nuanced planning may be needed, such as considering alternative engagement models in specific functions or business units, for example the use of consultants where appropriate or ensuring that there is a reputable UK agency in the chain.
How should umbrella companies respond to the changes?
Umbrella companies might be forgiven for thinking that these rules will reduce their compliance obligations, but this isn't necessarily the case.
As the new legislation operates alongside existing agency tax rules, umbrella companies are still required to operate PAYE and NICs on payments to employees. They should also ensure they remain compliant with their obligations under the Agency Workers Regulations (including for example, to ensure eligible workers receive the same basic pay as directly engaged staff).
HMRC has issued detailed guidance on "Examples of good practice for umbrella companies in the temporary labour market", available here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
