Umbrella tax shake-up: Agencies breathe easier, but new rules don’t get contractors and temps off the hook
A long-awaited update on umbrella company tax reforms offers a cautious sigh of relief, but a significant shift in liability means agencies and contractors need to pay close attention to ensure compliance
A collective sigh of relief?
The cloud of uncertainty hanging over the UK’s flexible workforce, particularly those working via recruitment agencies and umbrella companies, appears to be lifting. HMRC has announced its “direction of travel” for new tax legislation affecting the umbrella industry, set to take effect in April 2026.
The key takeaway? The introduction of ‘joint and several liability’ within the supply chain.
This news has been cautiously welcomed by industry experts, including contractor tax compliance specialist and insurer Qdos.
The insurer’s CEO, Seb Maley, said there was a “collective sigh of relief” among umbrella companies and recruiters following the news. The feared outcome of agencies directly operating PAYE obligations themselves seems to have been averted, replaced instead by a shared responsibility for tax deductions.
What does ‘joint and several liability’ mean?
Under the proposed changes, if an umbrella company makes incorrect tax deductions from April 2026, the liability for any shortfall won’t solely rest with them. Instead, it will be shared. Crucially, recruitment agencies will become liable for these incorrect deductions. If no agency is involved, the end-client will share this liability with the umbrella company.
The primary responsibility for any shortfalls, however, will lie with the “lead agency”. That’s the agency that holds the direct contract with the end-client. This approach, intended to ensure accountability across the supply chain, signals a tightening of regulations around umbrella company arrangements.
You’ll want an agency that does its due diligence
While agencies may be relieved not to take on the direct burden of PAYE, this new framework places a significant emphasis on due diligence. The financial consequences of engaging with a non-compliant umbrella company could be severe for an agency.
As Seb Maley warns,
Given agencies are set to carry the can for non-compliance carried out by another party, which has hallmarks of the off-payroll working rules, due diligence is set to become even more important in the lead up to April 2026.
Crawford Temple, CEO of Professional Passport, agreed with this sentiment, stating:
It will be interesting to see how the agencies react when they learn about their new positions under the proposed legislation – what is key is that there will be no excuses to mitigate their liabilities.
Recent cases of umbrella disguised renumeration schemes
Recent UK cases highlight HMRC’s crackdown on “disguised remuneration loan schemes” that leave contractors with significant tax liabilities.
In HMRC v Industria Umbrella Ltd (In liquidation) [2025] UKFTT 494 (TC), the First-tier Tribunal levied the maximum £1 million penalty for failure to notify arrangements under tax avoidance disclosure rules (DOTAS).
The FTT stated, “the fees charged by the promoter were high-level and given the question of whether the arrangements were notifiable was not complex, there was no reason for non-compliance.”
Separately, Liverpool-based Umbrella Union, which marketed itself as helping contractors “comply with financial regulations whilst remaining self-employed,” is being wound up after HMRC accused it of promoting tax avoidance.
HMRC’s analysis of Umbrella Union’s scheme found employees received a minimal PAYE salary and a “secondary element of their remuneration that is not subject to the deduction of income tax and NICs.”
HMRC’s position is clear: “Both elements of the payment should be treated as ‘normal income/as the user’s salary’, and therefore subject to tax and NICs.”
HMRC advises individuals to “familiarise themselves with the guidance and to satisfy themselves that the correct amount of tax is being deducted from their income.”
Are your payslip calculations correct?
If you or someone you know is joining an umbrella company for the first time, urge them to contact HMRC to ask if the umbrella is under investigation or on the HMRC list of excluded umbrella companies. Also, ask how much tax and which taxes should be taken out of your pay slip each time you get paid based on your salary or hourly rate, so you have an idea if you are paying the correct amount of tax.
HMRC offers online tips for this:
Red flags on a payslip that could be a sign of disguised remuneration or loan scheme
Working through an umbrella company – GOV.UK
Due diligence tools & the risks of using tax avoidance schemes
Check Your Pay – Check Your Pay
- Take notes when speaking to your agency, umbrella company, employer and HMRC
- Each pay slip must be checked and compared to the previous one to ensure you are not put on a disguised remuneration scheme at any point
- Any doubts on your pay slip calculations, have the finance department of your recruitment agency or employer explain the calculations in an email. This is your paper trail
- Under the new rules that come April 2026, it is in the interest of the agency to make sure the correct amount of tax is paid. Otherwise, they also get a big unplanned tax bill
An opportunity for compliant umbrellas
For compliant umbrella companies, this reform presents a significant opportunity. Maley suggests that umbrellas should view this as a chance to “demonstrate their compliance, which will make them an attractive proposition to the agencies they work with.” Agencies, under the new liability rules, will be incentivised more than ever to partner with robust, transparent, and compliant umbrella providers.
New rules, new protections for umbrella contractors?
HMRC plans to introduce a new chapter within the Income Tax (Earnings and Pensions) Act (ITEPA) to establish these joint and several liability provisions.
Draft legislation reflecting this position is anticipated within the next month, which should provide greater clarity on the final framework and address remaining “unanswered questions,” as noted by Temple.
Further guidance is also expected to assist all stakeholders in preparing for these important changes. But in the end, regardless if an agency or an end client does their due diligence, if an umbrella company is later found to be running disguised renumeration (i.e. contractor loans) with anything less than PAYE tax being withdrawn and paid to HMRC, the contractor will not be off the hook for paying back taxes.
So, while many contractors will initially feel like they’re getting more protection under the new rules from potentially dodgy umbrellas, they’re not.
