Umbrella company rules update

What is an umbrella company?  

An umbrella company is a company which employs you and sells your services to an end client, usually through an employment agency.  

For instance: 

• A business called Anemone Limited (the Client) is looking for coders to work short term contracts for them. 
• Anemone approaches Blossom Recruitment (the Employment Business). Anemone and Blossom sign a contract that Blossom will find workers and engage them to do the required coding work. 
• Blossom finds a candidate, Charles Coder (the Worker).  
• Blossom suggests that Charles works through an umbrella company, which they will introduce him to. 
• Dahlia Limited is the Umbrella Company. Dahlia will employ Charles and indirectly sell his coding services to Anemone, and to any other businesses who approach Blossom with suitable work for Charles. 
• Blossom and Dahlia sign a contract such that Dahlia employs Charles, pays his wages and deducts PAYE and national insurance contributions (NICs). 
• Dahlia invoices Blossom for the hours Charles works for Anemone. 
• Blossom invoices Anemone for the hours Charles works. 
• Anemone pays Blossom, Blossom pays Dahlia and Dahlia pays Charles.  

What has changed under the new rules?  

What umbrella company arrangements were intended to avoid  

Employment businesses and end clients historically used umbrella company arrangements because: 

• Clients don’t want to employ the workers, as they don’t have long term work available for them 
• Clients don’t want to engage the workers on a self-employed basis, as they were concerned that unclear employment and tax laws could mean they face big PAYE and NICs bills later if HMRC claimed the workers were actually employees 
• Umbrella companies meant the employment responsibilities lay with the umbrella company and not the end client (or the employment business) 

However, these risks have now reduced due to more case law in employment law giving clarity, the closure of an unintended double tax risk for end-clients in 2024 and clearer HMRC enforcement actions. 

New umbrella company arrangement risks 

New umbrella company PAYE rules came into effect on 6th April 2026. These rules introduced joint and several liability (JSL) for unpaid PAYE and NICs.  

This means that if umbrella companies do not pay the PAYE and NICs they owe HMRC, HMRC can collect these debts from the employment business or end client instead.  

PAYE responsibility moves to agencies or end clients  

The introduction of JSL is particularly difficult for end clients and employment agencies as there are no actions they can take to prevent HMRC making them pay the income tax and NICs: it is entirely down to whether the umbrella company pays its dues.  

Why the Government is introducing the changes  

The Government is introducing these changes because it has identified tax avoidance in some umbrella company arrangements and wants to ensure HMRC does not miss out on tax revenue it should receive. 

Who is affected by the umbrella company rules update?  

• Employment businesses and employment agencies – may have to pay missing PAYE and NICs debts to HMRC if umbrella companies they contract with do not pay up.  
• End clients – also may have to pay the PAYE and NICs debts of umbrella companies where they have used the umbrella company’s employee. 
• Umbrella companies – may be asked to sign stricter contracts by employment businesses or face stricter checks from employment businesses or end clients. 
• Workers – may be asked to engage with clients in different ways to help reduce their risks. 

What does not change?  

The PAYE system still works in the same way and the umbrella company still has the first responsibility to operate payroll, make deductions from the workers and pay over the PAYE and NICs to HMRC. 

Workers should still receive their pay net of PAYE and employee NICs from the umbrella company.  

When do the rules apply (and when they don’t)?  

There are a number of exclusions where the new JSL rules do not apply: 

• Payments made before 6th April 2026. 
• The worker is employed by a Personal Service Company (PSC). A PSC is a company which the worker typically controls by owning shares and being a company director. The IR35 rules may apply to PSCs.  
• The worker is employed by a Managed Service Company (MSC) – PAYE and NICs debts of MSCs can already be collected from company directors or the MSC Provider. 
• Members of Limited Liability Partnerships (LLPs). 
• Deemed agency workers. 

What should businesses do now?  

There are a number of steps that end clients (and employment businesses and agencies) can take to check if they are at risk of unexpected PAYE and NICs charges.  

1. Review labour supply chains and act on any findings. 
2. Check contracts and add clauses to help protect your business. 
3. Review payroll responsibility and ensure all parties understand their duties. 
4. Check the payslips of workers to ensure umbrella companies are making the correct deductions for HMRC. 
5. Avoid offshore umbrella companies or any associated with tax avoidance schemes on HMRC’s list. 

Other ways of taking on workers 

The only way to entirely avoid the risk of HMRC transferring umbrella company debts to your business is to avoid engaging with workers through umbrella companies. Other methods of taking on workers include: 

• Direct employment – the simplest method, but this does involve operating payroll and all the responsibilities of an employer.  
• Hiring a self-employed contractor – they invoice you and you pay their invoices. Check their employment status for tax purposes and what employment law rights they may still have as a ‘worker’. 
• Engaging a worker through their PSC – the PSC will invoice you and you pay the invoices. You will need to consider the off-payroll working rules (IR35) and take steps to meet your duties under them. 

How can TaxAssist Accountants help? 

Our team can help businesses, limited companies, sole traders and employed individuals work through the new umbrella company rules and advise you on your responsibilities, wherever you are in the labour supply chain. 

Call now on 0800 0523 555 or use our online contact form. 

Last updated: 21st August 2026