New rules affecting umbrella companies came into force on 6 April 2026 and have changed where the financial risk sits when PAYE and NICs are not dealt with correctly. Helen Wood of TaxAssist Accountants explains how umbrella companies work, what has changed and the practical implications for businesses.
What is an umbrella company?
An umbrella company employs workers and supplies their services to an end client, usually through a recruitment agency or employment business.
In a typical arrangement, an end client requires temporary workers and engages an agency to source suitable candidates. The worker is then employed by the umbrella company, which contracts with the agency and supplies the worker’s services to the end client.
The umbrella company is the worker’s employer. It is responsible for:
- Operating payroll
- Deducting income tax under PAYE
- Deducting employee NICs from the worker’s compensation
- Paying employer NICs
- Issuing payslips to the worker
- Paying the worker
The end client pays the agency, the agency pays the umbrella company, and the umbrella company pays the worker.
How were the Pay As You Earn (PAYE) rules changed from 6 April 2026?
The new rules apply to relevant payments made to workers on or after 6 April 2026 where an umbrella company forms part of the labour supply chain. Under the legislation, responsibility for unpaid PAYE can be transferred beyond the umbrella company opens new window in certain circumstances.
Where an agency has a direct contractual relationship with the end client, that agency is responsible for ensuring PAYE is operated correctly. If there is no agency involved, responsibility falls to the end client. HMRC can recover underpaid PAYE and National Insurance contributions (NICs) from the responsible party if the umbrella company fails to account for them correctly.
The result is a significant shift in risk. Businesses may now face a PAYE liability even when they are not responsible for operating payroll or making payments to workers.
Why are umbrella company arrangements popular?
Umbrella company arrangements developed because they offered a practical solution for businesses requiring flexible labour.
End clients often need workers for projects, due to seasonal demand or for short-term assignments but do not want the administrative burden of becoming the worker's direct employer. At the same time, businesses may be reluctant to engage individuals on a self-employed basis where employment status is uncertain.
Umbrella companies created a straightforward structure by acting as the employer. The umbrella company assumed payroll responsibilities while the worker retained access to employment rights associated with being employed.
For many organisations, this reduced administrative complexity and provided a degree of certainty regarding PAYE obligations.
How do the new rules affect compliance and PAYE risks for businesses?
While umbrella companies continue to operate payroll, the new rules mean agencies and end clients can no longer assume that the tax risk sits solely with the umbrella company.
If an umbrella company fails to pay the correct amount of PAYE and NICs, HMRC may seek recovery from the agency or end client that falls within the scope of the legislation.
This means organisations need to understand their labour supply chains in far greater detail than before. Businesses should know:
- Who employs the worker
- Who pays the worker
- Which organisation operates payroll
- Where contractual responsibility sits
- Whether sufficient compliance checks are being carried out
The changes are particularly important for businesses that regularly engage temporary workers through multiple intermediaries.
Why were the changes introduced?
The Government introduced the new rules following concerns about non-compliance within parts of the umbrella company market.
Some arrangements have been associated with tax avoidance and the underpayment of PAYE and NICs. The reforms are designed to protect tax revenues and encourage greater oversight throughout labour supply chains.
By extending liability beyond the umbrella company itself, HMRC has greater scope to recover unpaid tax where non-compliance occurs.
How are businesses and workers affected by the changes?
The reforms affect several parties within labour supply chains.
Employment businesses and recruitment agencies
Employment businesses may be exposed to unexpected PAYE and NIC liabilities if an umbrella company fails to comply with its obligations.
As a result, agencies may introduce additional due diligence procedures and require stronger contractual protections from umbrella companies.
End clients
Businesses that rely on temporary workers may also be affected, particularly where there is no agency in the labour supply chain.
End clients are increasingly being encouraged to understand how workers are engaged and whether appropriate compliance procedures are in place.
Umbrella companies
Umbrella companies remain responsible for operating payroll correctly and making payments to HMRC.
However, they are likely to face increased scrutiny from agencies and end clients seeking reassurance that compliance standards are being maintained.
Workers
For most workers, day-to-day arrangements may appear largely unchanged. They should continue to receive their pay from the umbrella company after PAYE and NIC deductions.
However, workers may find that agencies or end clients wish to engage them through alternative arrangements or ask for additional information before work begins.
Have PAYE obligations remained the same?
Despite the reforms, the fundamental operation of payroll remains the same. The umbrella company continues to be responsible in the first instance for:
- Calculating payroll correctly
- Making PAYE deductions
- Accounting for employee and employer NICs
- Paying HMRC
- Paying the worker
Workers should still receive their net pay from the umbrella company after the appropriate deductions have been made.
The legislation does not transfer day-to-day payroll operation to agencies or end clients. Instead, it gives HMRC additional recovery powers where PAYE has not been paid correctly.
Are there situations where the new rules do not apply?
The legislation does not apply in every labour supply arrangement. Examples of arrangements outside the main rules include:
- Certain workers operating through their own Personal Service Company opens new window (PSC)
- Workers treated as employed through a Managed Service Company opens new window (MSC)
- Salaried members of a Limited Liability Partnership (LLP)
- Individuals treated as employed under the agency worker rules opens new window
Payments made before 6 April 2026 are also outside the scope of the legislation.
Businesses should not assume that an exclusion automatically applies. The contractual arrangements and working practices should always be reviewed carefully.
How can businesses manage risk within labour supply chains?
Given the increased exposure to PAYE liabilities, businesses should review their current arrangements as soon as possible.
Practical steps include:
- Mapping labour supply chains
- Reviewing contracts with agencies and umbrella companies
- Confirming who is responsible for PAYE compliance
- Reviewing workers' payslips where appropriate
- Performing due diligence on labour suppliers
- Monitoring compliance on an ongoing basis
- Keeping clear records of checks undertaken
Regular reviews can help identify risks before they become liabilities, although due diligence alone will not remove the statutory obligations created by the legislation.
What are the alternatives to using umbrella companies?
Some organisations may decide that the additional compliance burden associated with umbrella companies outweighs the benefits.
There are several alternative ways to engage workers which are worth considering.
Direct employment
This provides the greatest level of control but also places full payroll and employment law responsibilities on the employer.
Self-employed contractors
Where a contractor is genuinely self-employed, they invoice the business directly and account for their own taxes. However, organisations should carefully consider employment status and employment rights.
PSCs
Workers may choose to provide services through their own PSC. In these arrangements, the company invoices the client and handles payroll for the worker.
Where this approach is adopted, businesses should consider the implications of the off-payroll working rules, commonly known as IR35 opens new window, and take steps to meet your duties under them.
About the author
Helen Wood is a qualified chartered accountant (CA) and joined TaxAssist Accountants opens new window as Technical Content Writer in 2025, following three years as a freelance content writer for clients in the tax and accounting publishing sector. Prior to this, she spent 17 years at Big Four and Top 10 accountancy firms. Helen writes clear and helpful articles on tax and accounting for businesses and individuals.
See also
Who needs to join Making Tax Digital for Income Tax and when?
Find out more
Personal service companies & IR35 opens new window (Parliament)
Managed Service Companies (Spotlight 67) opens new window (GOV.UK)
Your rights as an agency worker opens new window (GOV.UK)
Understanding off-payroll working (IR35) opens new window (GOV.UK)
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Publication date
24 September 2026
Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.