End Clients to Be Liable for Umbrella Company Tax
Compliance from April 2026
In a major shift for labour supply chain compliance, the UK government has announced that from April 2026, the responsibility for PAYE and National Insurance contributions (NICs) on earnings paid via umbrella companies will no longer sit with the umbrella itself—it will be passed up the chain to either the end client or a UK-based recruitment agency.
This marks a significant tightening of tax enforcement and will have widespread implications for employers and staffing agencies that engage contractors through umbrella arrangements.
What’s Changing?
Currently, umbrella companies are responsible for deducting PAYE and NICs from workers they employ and supply to end clients. But under the new rules:
End clients, or
The UK agency with a direct contract with the end client (if multiple agencies are involved),
will become legally responsible for operating PAYE and NICs for umbrella company workers.
This change is being introduced to clamp down on tax avoidance and non-compliance in the umbrella sector, which HMRC estimates affected over 275,000 workers in the 2022/23 tax year.
What Is an Umbrella Company?
An umbrella company acts as an intermediary between workers and the end user. It employs the worker, manages payroll, submits timesheets, invoices the agency or client, and processes PAYE/NICs.
Umbrella models became increasingly common following the extension of IR35 rules to the private sector in April 2021, when many businesses opted to avoid direct contractor engagements by routing them through umbrella companies.
Why the Change?
While many umbrella companies are fully compliant, some use artificial tax schemes or fail to correctly operate PAYE/NICs, putting public finances at risk.
The government has now moved beyond encouraging due diligence and will make end users and agencies liable for failures, thereby placing responsibility where it can be enforced most effectively.
What Do Employers and Agencies Need to Do?
Although the reforms won’t come into force until April 2026, organisations should start preparing now. Key steps include:
Audit current use of umbrella companies
Understand who your contractors are engaged through and review contracts accordingly.Evaluate risks
Consider whether continuing to use umbrella providers will remain viable once tax risk is transferred to your organisation.Enhance due diligence
If you continue to use umbrella companies, strengthen onboarding and monitoring processes, including tax and compliance checks.Budget for increased costs
If you become liable for PAYE/NICs, this could impact overall labour costs—particularly for higher-paid or long-term engagements.
What’s Next?
The government has promised to publish more detailed guidance and draft legislation later in 2024, ahead of the 2025 Finance Bill. Stakeholders will also be invited to consult on how the rules should operate in practice.
With nearly 18 months to prepare, employers should use this time to review their labour models, train internal teams, and consider alternative contracting solutions where appropriate.
FAQs: PAYE/NICs and Umbrella Companies – 2026
Q: Does this mean umbrella companies will be banned?
A: No. Umbrella companies can still operate, but from April 2026, they will no longer shield clients or agencies from tax liability.
Q: Who will be liable if there are multiple agencies in the supply chain?
A: The agency with the direct contractual relationship with the end client will bear the liability, unless no UK agency is involved—in which case, the end client is responsible.
Q: Does this affect contractors who operate via limited companies (PSCs)?
A: No. These rules apply specifically to umbrella company engagements, although IR35 and off-payroll working rules continue to govern PSC arrangements.
Q: Will HMRC issue guidance or support to help employers prepare?
A: Yes. The government has pledged to consult and publish operational guidance and draft legislation in late 2024.
Final Thoughts
From April 2026, businesses can no longer rely on umbrella companies to manage PAYE and NICs liabilities. Whether you’re an end client or a staffing agency, this reform shifts the tax risk squarely onto your shoulders.
Now is the time to:
Map your labour supply chain
Reassess risk exposure
Evaluate whether umbrella models still work for your business
Our team of employment law experts can support you with audits, compliance reviews, and contractual updates to ensure you’re ready for this significant change.