PAYE Peril: New law threatens double tax for agencies and hirers. Contractors still not protected
A warning has been issued to the UK’s recruitment sector: a significant change in tax legislation, coming into force in April 2026, could see agencies and hirers forced to pay their workers’ PAYE twice over
Professional Passport, an umbrella company compliance service, cautions that the government’s new Joint and Several Liability (JSL) draft legislation will create “Collective Liability,” leaving businesses exposed to an umbrella company’s tax debts, even if those debts were incurred by others.
“The reality of JSL is that it may create Collective Liability,” said Crawford Temple, CEO of Professional Passport, speaking to an audience of agencies and end hirers in London today. “Every agency and hirer using an umbrella and not paying the PAYE in respect of its own workers directly to HMRC will find itself underwriting everyone else’s risk,” he said.
Without an audit trail that proves each worker’s pay, with deductions as well as the resulting PAYE liabilities being paid to HMRC, agencies and hirers are automatically exposed.
-Crawford Temple, Professional Passport
JSL: What’s changing for agencies and hiring companies?
Under the current system, the end client pays the agency, the agency pays an uplifted rate to the umbrella company, which then calculates pay, sending net wages to the worker and payments to HMRC for PAYE and VAT. However, this established process is about to face unprecedented scrutiny.
From April 2026, unless agencies and hirers can demonstrate a verifiable audit trail proving that each worker’s PAYE has been paid directly to HMRC, quoting the correct umbrella’s PAYE reference, they will have no protection against potential liabilities, according to Temple. This means they could be liable to pay that PAYE all over again, effectively contributing to an umbrella company’s tax debts, even if they have already transferred the funds.
“Without an audit trail that proves each worker’s pay, with deductions as well as the resulting PAYE liabilities being paid to HMRC, agencies and hirers are automatically exposed,” warned Temple.
This exposure applies even if the business operates correctly, meaning that errors or misconduct by other “bad actors” in the supply chain – be it an umbrella, payroll provider, or another agency – could lead to an agency or hirer footing the bill.
HMRC can apportion debt proportionately across all agencies based on their workers and the associated unpaid PAYE. Temple warned agencies are often left in the dark when an enquiry into an umbrella company is opened, potentially increasing their liability for months, rendering indemnities worthless.
How does this impact contractors and umbrella companies?
While the immediate financial burden falls on agencies and hirers, contractors working through umbrella companies could still be at risk for an unpaid tax bill and pay disruptions until audit trail systems are established, put to use and running smoothly.
For contractors:
- Potential for payroll disruptions: The shift to a two-payment process, where agencies might pay net wages to the umbrella and PAYE directly to HMRC, could introduce complexities. Delays in payment processing or administrative errors could impact when a contractor receives their net pay. That is why contractors must ask questions about which audit system is in place and working.
- Reduced choice of umbrella companies: Agencies and hirers will likely become far more stringent in their selection of umbrella partners, favouring those that can seamlessly integrate with a direct PAYE payment model. This could limit a contractor’s options.
- Increased scrutiny works both ways: Contractors might face more questions or requests for information from their agency or umbrella to ensure a robust audit trail for their specific tax payments.
For umbrella companies:
- Mandatory operational changes: Umbrella companies would have to adapt their systems to facilitate the direct payment of PAYE by agencies/hirers to HMRC, under the umbrella’s PAYE reference. Those unable to do so may find themselves losing business.
- Enhanced transparency demands: Agencies and hirers will demand unprecedented levels of transparency and verifiable proof of tax compliance from umbrella companies.
- Risk of losing business: Umbrellas that cannot provide a robust and auditable system for PAYE payments will be deemed too risky by agencies and hirers, potentially leading to a significant loss of clients.
Finding an audit system that protects everyone
“Current systems offer no protection – at best, they provide an element of risk profiling,” cautioned Temple. “The only way to protect your business is to pay your workers’ PAYE directly to HMRC, correctly quoting the PAYE reference of the umbrella, and thus maintain a clear and detailed audit trail.”
Temple’s company, Professional Passport, claims it is rising to the challenge by designing a new system. Here is what he is suggesting to protect users:
- Upload payment data through a secure system
- Transfer net pay and VAT to the umbrella
- Pay PAYE directly to HMRC, under the umbrella’s PAYE reference
This two-payment process, which Temple claimed would be supported by Professional Passport’s reporting and validation, could ensure agencies can demonstrate compliance and ring-fence themselves against Collective Liability.
Essential questions contractors must ask
To safeguard their income and ensure compliance, contractors should proactively engage with their hiring company, recruitment agency, and umbrella company. Stand your ground if you get resistance.
Questions to ask:
- How will you ensure my PAYE is paid directly to HMRC from April 2026, and what is the process?
- How can I regularly access a clear audit trail showing my specific PAYE payments remitted to HMRC?
- What steps are you taking to comply with the new Joint and Several Liability legislation?
- In the event of any tax shortfall related to the umbrella company, what is the resolution process, and who bears the responsibility?
Proof to request information:
Payslips: Always ensure you receive clear, itemised payslips detailing all deductions, especially PAYE and National Insurance.
HMRC’s Real-Time Information (RTI) Submission: Request confirmation or a copy of the RTI submission that your umbrella company sends to HMRC, verifying your earnings and deductions have been reported.
Evidence of PAYE payment to HMRC: While individual receipts are unlikely, ask for proof that the PAYE portion of your earnings has been successfully remitted to HMRC under the umbrella company’s PAYE reference. This might be a statement or a system screenshot.
“Without this, you are working on a ‘trust me, it’s alright’ basis, and trust is not a defence against HMRC,” said Temple.
