From April 2026, new rules affecting umbrella companies will sit directly alongside the off‑payroll working (IR35) regime. These changes are relevant for businesses that engage contractors and contingent labour, particularly as we approach the start of the new tax year, when annual intermediary assessments normally take place.

As a reminder, the off‑payroll working rules require medium and large organisations to determine the employment status of workers engaged through intermediaries such as personal service companies (PSCs). Where the rules apply, the organisation (or agency) must run PAYE and NIC.

Umbrella companies sit outside these rules because they employ the worker directly and operate PAYE themselves. They became more commonly used after the 2021 private‑sector IR35 reforms as a way for businesses to ensure tax compliance and access flexible labour.

Why off-payroll working needs attention now

HMRC has confirmed that new PAYE rules for labour supply chains involving umbrella companies will apply to all payments made to workers on or after 6 April 2026. This includes a shift in responsibility, with recruitment agencies or end clients becoming jointly and severally liable for unpaid PAYE if an umbrella fails to operate payroll correctly.

Because umbrella engagements often sit outside IR35, many businesses have relied on them as a lower‑risk alternative to PSCs. That assumption is changing. Employment tax governance now needs to cover all types of intermediaries.

Aligning umbrella due diligence with annual off-payroll reviews

Many organisations perform their annual off‑payroll reviews and intermediary assessments at the start of each tax year. Helpfully, the implementation date for umbrella changes (6 April 2026) aligns with the period when organisations revisit:

• Employment status determinations
• IR35 processes and policies
• Supply‑chain mapping for contingent labour.

Bringing umbrella‑related due diligence into the same annual cycle is essential and a practical approach.

What the umbrella company changes mean in an off-payroll context

Although the off‑payroll rules themselves are not changing, the new umbrella framework affects how businesses should approach contingent labour compliance more broadly.

Increased employment tax exposure for labour supply chains

Under the 2026 rules, HMRC can recover underpaid PAYE/NIC from the agency or end client where an umbrella fails to meet its obligations.

This means umbrella engagements now carry real employment tax risk in a way many organisations have not previously had to consider.

Wider definition of ‘umbrella company’ brings more worker arrangements in scope

The definition of an umbrella company is intentionally broad and may capture more types of engagement models than businesses expect, including some labour‑supply or secondment arrangements.

Businesses need to reassess which engagements fall outside or within off-payroll working, and which fall within the new umbrella rules.

Umbrella checks now need to sit alongside IR35 assessments

Since the umbrella reform applies at the same time as annual IR35 reviews, businesses should treat all contingent worker assessments as a single exercise rather than separating PSCs and umbrella workers.

Steps to take before the new tax year

Review current off-payroll processes

Identify where umbrella companies are used as alternatives to PSCs and assess whether controls around those engagements are consistent with your IR35 governance.

Include umbrella due diligence in April assessments

Because the new rules begin at the start of the tax year, April 2026 reviews should include:

• Supply‑chain mapping
• Umbrella provider checks
• Confirmation of who in the labour chain is responsible for operating PAYE
• Documentation supporting tax risk decisions.

Prepare for the new PAYE liability model

Make sure internal teams understand that umbrella engagements could lead to liability for the business if PAYE failures occur further down the chain. This is clearly set out in HMRC’s guidance on the new rules.

Communicate with hiring managers and procurement

Many umbrella engagements start with operational teams not familiar with the upcoming tax changes. Clear guidance will help prevent unexpected liabilities.

Employment law issues associated with umbrella company arrangements

Workers engaged through umbrella companies are employees of the umbrella, rather than of the end client. While the umbrella is responsible for core employment obligations, employment law looks beyond contractual labels to the reality of the working relationship.

Where the end client exercises day-to-day control over the work or integrates individuals into its workforce, the use of umbrella arrangements can still give rise to employment law risk, particularly where labour is used at scale or over long periods. Workers in this kind of arrangement may bring claims against both the end client and the umbrella company if they feel unfairly treated or are not properly paid.

Even if the end client is not deemed liable, it can still suffer from reputational consequences. So it is critical that due diligence and regular audits take place and the basic employment rights are complied with.

Fair pay risks in umbrella supply chains

Umbrella arrangements often involve complex pay structures, including assignment rates, margins and holiday pay accrual. While umbrellas are responsible for holiday pay and National Minimum Wage compliance, disputes commonly arise where holiday pay is miscalculated, rolled up incorrectly, or deductions reduce pay below statutory minimums.

End clients must make sure that workers engaged by an umbrella through an employment agency are treated equally to those who would have been hired directly, after 12 weeks’ continuous service. If not, both the agency and the end client will be liable for any claims of unfair treatment. A common issue is not upgrading any holiday entitlement to match what the end client normally offers.

Risk increases where working patterns, time off or pay are driven by the end client. This risk is expected to grow with the introduction of the Fair Work Agency, which will bring sharper enforcement of holiday pay, National Minimum Wage and other worker protections, with umbrella arrangements in scope.

Next steps for off-payroll workers

Umbrella company changes from 6 April 2026 introduce new tax exposure for businesses. As we approach the new tax year, when annual intermediary and IR35 assessments take place, now is the natural point to update processes and strengthen compliance.

Umbrella arrangements also raise employment law risk, and enforcement activity is going to increase with the introduction of the Fair Work Agency. It is sensible to use this time to review umbrella governance alongside tax and off-payroll compliance. Audits of the labour supply chain should be carried out to identify whether there are any umbrella companies within it and verify that they are complying with their legal obligations.

By integrating umbrella company checks into existing off‑payroll workflows, businesses can enter the 2026/27 tax year with a robust and compliant approach to engaging contingent labour.

For more information, please get in touch with Andrew Timpson or your usual RSM contact.

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