Umbrella company rules from April 2026: agency PAYE liability

Since 6 April 2026, the recruitment agency that supplies a worker to an end client is jointly and severally liable for any PAYE an umbrella company fails to pay. Where there is no UK agency in the chain, or certain parties are connected, the end client carries that liability. HMRC can recover the full shortfall from whichever party it chooses.

What changed on 6 April 2026?

Before April 2026, the umbrella company, as the worker’s employer, was the only party liable for PAYE. Non-compliant and mini umbrella companies could disappear owing tax, leaving HMRC to chase a shell.

The new rules put the agency or end client on the hook as well. They apply to new and existing supply chains, for money paid to workers on or after 6 April 2026, according to HMRC’s guidance PAYE rules for labour supply chains that include umbrella companies (updated 19 June 2026).

The law is section 24 of the Finance Act 2026, which inserts a new Chapter 11 into Part 2 of ITEPA 2003. Section 61Y imposes joint and several liability, section 61Z defines the relevant party, and section 61Z1 deals with purported umbrella companies.

What does the liability cover?

The liability covers the PAYE amounts an umbrella company should have paid. HMRC lists these as:

• PAYE income tax
• student loan repayments
• employee National Insurance contributions
• employer National Insurance contributions

The umbrella company still has to calculate and pay these correctly. HMRC’s guidance says: “If we find an umbrella company has not paid the correct amount of PAYE to us, we’ll recover it from you.” It does not matter which party pays, as long as the full amount is paid.

Who is liable: agency or end client?

The liable party depends on the shape of the supply chain. HMRC’s manual at ESM2420 (updated 7 October 2026) sets out these cases.

“Connected” has the meaning in section 993 of the Income Tax Act 2007, which covers relatives, group companies and companies under common control.

Which workers are outside the rules?

HMRC says the rules do not apply where workers are:

• engaged through their own personal service company, if the conditions in the IR35 rules are met
• deemed employed through a managed service company (ESM3510)
• salaried members of an LLP
• treated as employed by the agency itself (ESM2039)

The rules can still bite in some of these cases if the business is a “purported umbrella company” under section 61Z1.

Which applies to you?

• If you are a recruitment agency contracting with the client, you carry the risk for every umbrella you use.
• If you are an end client using agencies, you are usually only liable if the agency is overseas or connected to you, or if you hire directly from an umbrella.
• If you are a contractor paid through an umbrella, your take-home should not change if the umbrella was compliant. Compare options in umbrella vs limited company.
• If you run your own limited company outside IR35, these rules do not apply to you.

Why did the government do this?

The aim is to shut down umbrella companies that underpay tax. HMRC’s policy paper, published 26 November 2025, says about 700,000 people work through umbrella companies. It expects about 30,000 agencies and 400 umbrella companies to face admin costs.

The OBR-certified costing is £715 million in 2026/27 and £635 million in 2027/28. Class 1 National Insurance liability is set through separate regulations under section 4A of the Social Security Contributions and Benefits Act 1992.

What agencies and clients should do now

HMRC’s guidance for employment businesses working with umbrella companies lists the checks. A working checklist:

1. Map the chain. Record every business between the worker and the client.
2. Check each umbrella. Confirm Companies House details, VAT registration, the bank account name and employers’ liability insurance.
3. Get payslips from workers. Compare pay and deductions with the assignment rate you paid.
4. Watch for mini umbrella signs. Changing PAYE references, mismatched employer names and frequent new key information documents are red flags.
5. Issue key information documents yourself. You cannot pass this duty to the umbrella.
6. Keep records of every check. HMRC says not knowing is not a defence in most cases.
7. Review contracts. Consider warranties, audit rights and payment terms with each umbrella. HMRC’s guidance does not cover indemnities, so take legal advice.

Payroll teams should also confirm how umbrella PAYE flows through RTI submissions so shortfalls are spotted early.

What comes next?

Umbrella companies are also to be brought into the legal definition of an employment business. The government’s Employment Rights Act timeline, updated 5 November 2026, lists regulation of umbrella companies for December 2027. Our Employment Rights Act timeline tracks the other dates.

Workers can check their payslips using HMRC’s working through an umbrella company guidance, and our list of umbrella companies explains how they charge.

Frequently asked questions

When did the umbrella company PAYE rules start?

They apply to payments made to workers on or after 6 April 2026. They cover existing supply chains as well as new ones.

Is the agency liable for umbrella company tax?

Yes. The agency that contracts with the end client is jointly and severally liable with the umbrella company for unpaid PAYE and National Insurance.

When is the end client liable?

The end client is liable where it contracts directly with the umbrella, where the agency is not UK resident, or where it is connected to the agency or umbrella.

Do the rules affect contractors’ take-home pay?

Not directly. The umbrella still runs payroll and deducts tax. The change is about who pays HMRC if the umbrella does not.

Do the rules apply to personal service companies?

No, not where the worker is engaged through their own personal service company and the off-payroll rules apply. Managed service companies and salaried LLP members are also outside.