Umbrella company tax reform has landed in the UK

The umbrella company tax legislation, published in the Finance Bill on 4 December 2025, will now form the new Chapter 11 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). Those who use umbrella workers (clients), agencies, managed service providers (MSPs), and umbrellas have four months to plan and prepare before the new legislation comes into force, on 6 April 2026.

What’s changing

From 6 April 2026, if an umbrella company does not pay the correct pay-as-you-earn (PAYE) or national insurance contributions (NICs) across to HMRC, the "top" agency in a labour supply chain will be jointly and severally liable with the umbrella company for those taxes. Where there is no agency and the client hirer contracts direct with an umbrella company or contracts with an agency that is either "connected" to the umbrella company or is based outside the UK, the end user will be jointly and severally liable with the umbrella company.

The legislation is widely drafted. What constitutes an “umbrella company arrangement” includes traditional umbrellas, also employers of record (EORs), some consultancies and hire-train-deploy providers that employ the individuals they second and deploy to hirer clients. An umbrella company arrangement also includes any agency that actually employs the agency workers supplied to client hirers under contracts of employment.

To cast the net even wider a new concept of “purported umbrella company" has been introduced to catch intermediaries that present as or appear to be employers but which in reality pay individuals off-payroll such as via personal service companies (PSCs), or Construction Industry Scheme (CIS), or otherwise avoid accounting for PAYE and NICs on payments to the workers. 

What’s not changing

Umbrellas can still hold the employer reference number and run PAYE.

Agencies can still engage agency workers on contracts for services and pay them as PAYE agency workers under the agency tax legislation.

Engagements with personal service companies will continue to be subject to IR35 or the off-payroll rules, and genuine CIS subcontracting will still apply (subject to correct supervision, direction and control (SDC) analysis). The exception will be if any of these arrangements are purported umbrella companies, based on the criteria set out in the new legislation. 

No statutory defence

This is a strict liability regime which means that even robust checks will not be a legal defence if tax goes unpaid – the agency or client (whichever applies) will be liable if the umbrella defaults, including where the umbrella has failed to pay tax for any reason. "Trying our best to check" or "hiring third parties" to do so will provide no defence under the new regime.

Nevertheless due diligence will remain necessary to eliminate the obvious bad actors from supply chains and to provide statutory defences under other legislation such as under the failure to prevent tax evasion and fraud regimes.

So what are the expected impacts?

MSP models may be restructured or move to tighter, smaller “approved” umbrella panels. Smaller umbrella companies, particularly those that have offered unsustainable credit terms to agencies, will likely lose market share to the big umbrellas, with some going into administration before April 2026.

Contractual indemnities will be relied on to provide protection. But, alone, indemnities will not guard against potentially business-changing levels of tax liability.

Insurance-backed checking arrangements may be relied on by many, but may not always cover all the relevant risks, such as where the tax default occurs as a result of historic things that have not been checked by the checker or which have not been caused by payroll non-compliance.

In some cases, hirer clients or MSPs may prohibit umbrellas or mandate short lists. They will also want to carry out their own checks to ensure that agencies they contract with are not offshore or connected to any umbrella company with which the agency deals.

Some agencies may shift towards greater use of in-house payroll, and in some sectors, increased use of self-employed engagements (including PSC and CIS) is likely where the working arrangements genuinely reflect self-employment. Renewed interest in statement of work-style engagements involving the provision of a deliverable rather than person's time can also be expected. 

What are the next steps?

Parties in staffing supply chains will want to:

• Review how contingent workers are paid and by whom, and to identify which umbrella companies are used. This review will be critical in deciding how to manage any umbrella-related risk. It will also be important for anyone planning to sell their company – questions about worker pay-related tax risk are now key parts of the due diligence process.
• Revisit and tighten contracts to give greater transparency and audit rights.
• Carry out enhanced due diligence and ongoing monitoring, not only for umbrella tax legislation purposes but also for other pre-existing supply chain risks (such as failure to have reasonable procedures under the Criminal Finances Act or the Economic Crime and Corporate Transparency Act, compliance with national minimum wage, and Modern Slavery Act requirements).
• Identify any dependence on cashflow assistance provided by umbrellas and consider alternative funding options.
• Plan worker communications and implement new engagement arrangements with care; allowing, where possible, current assignments to end before requiring use of new preferred umbrella companies.

See our full briefing for more detail on how the umbrella reforms will work and their impact on staffing supply chains.