New legislation could significantly change the use of umbrella companies in the UK’s temporary labour market. The reforms aim to address concerns over the ongoing issues of tax avoidance and work exploitation within labour supply chains. From 6 April 2026, greater responsibility will be placed on recruitment agencies to ensure compliance throughout their operations. This will likely have far-reaching implications for recruitment agencies, contractors and end clients alike.

What is the new umbrella company legislation?

Umbrella companies typically act as intermediaries in the labour supply chain. They often employ contractors on behalf of recruitment agencies and handle payroll, tax and HR responsibilities. This allows agencies to focus on core business activities while ensuring contractors are paid and taxed appropriately.

But HMRC has found widespread abuse of this model. Some umbrella companies facilitate tax avoidance schemes, leaving workers with unexpected liabilities for income tax and national insurance contributions (NICs). Alarmingly, HMRC also suspects that organised criminal gangs are exploiting umbrella companies for labour supply chain fraud.

To address these issues, draft legislation proposes the introduction of joint and several liability for PAYE and NICs. This means that recruitment agencies – and in some cases, end clients – will be held responsible for unpaid tax and NICs if an umbrella company fails to meet its obligations.

What does this mean for recruitment agencies?

Under the new rules, agencies will be jointly and severally liable for PAYE and NICs where:

• A worker provides services to a client.
• The worker is employed by a third party (the umbrella company).
• The umbrella company arrangement conditions are met.

In most cases, the recruitment agency that holds the contract with the client will be considered the ‘relevant party’ and will be responsible for any unpaid PAYE and NICs. However, there are specific cases where the end client could also be liable:

• The client contracts directly with the umbrella company.
• The agency is connected to the umbrella company.
• The agency is not based in the UK.

If neither the client nor the agency is a UK resident, liability falls to whichever UK-based agency is closest in the labour supply chain. Importantly though, the legislation doesn’t apply to deemed employment under IR35, but does introduce a statutory definition of umbrella companies for the first time. This definition is broad and could include other employment intermediaries, especially if their workers perform duties in the UK.

How your recruitment agency should prepare for the changes

Failure to adapt to the new requirements could expose agencies to liability for unpaid PAYE and NICs, as well as damage a firm’s reputation and relationships with clients and contractors. Here’s how to start preparing:

• Review labour supply chains: conduct thorough due diligence on supply chains to identify all parties involved and assess their compliance with PAYE and NICs obligations.
• Assess risk exposure: determine where liability may fall within supply chains, particularly in arrangements involving employers of record or overseas entities.
• Update contracts and policies: ensure that all your contracts with umbrella companies and clients clearly define responsibilities and compliance expectations. Consider adding indemnity clauses to protect against potential liabilities.
• Monitor legislative updates: stay informed and be ready to adapt as final details are confirmed.
• Educate internal teams: make sure finance, legal and compliance teams understand the new rules and their implications for your business.

What is the future for umbrella companies in the UK?

While the legislation does not signal the outright end of umbrella companies, it does mark a turning point. Compliant umbrella companies will still have a role to play, but recruitment agencies must be vigilant and proactive to avoid financial and reputational damage. With the 2026 deadline on the horizon, businesses should take steps today to not only protect themselves from regulatory pitfalls but also demonstrate their commitment to ethical and responsible labour supply.

We can help you navigate the complexities of this new legislation. If you would like advice on how to implement necessary changes and protect your agency from risk, please do get in touch with Neil Thomas or your usual RSM contact.

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