Umbrella Company Rules for Recruitment Agencies - PAYE Liability and Due Diligence

From 6 April 2026, recruitment agencies that supply workers through umbrella companies carry joint and several liability for the PAYE those umbrella companies should pay. The rules sit in a new Chapter 11 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003, inserted by the Finance Act 2026, which received Royal Assent on 18 March 2026.

The effect is blunt. If an umbrella company in your supply chain fails to account for Income Tax and National Insurance on a worker's pay, HMRC can recover the full shortfall from the agency that holds the contract with the end client. Where there is no agency in the chain, the end client carries the liability instead.

A second change follows behind it. The Employment Rights Act 2025 expands the legal definition of an employment business to cover umbrella companies, bringing them within the Conduct of Employment Agencies and Employment Businesses Regulations 2003 for the first time. That regulation is expected to take effect in 2027, enforced by the Fair Work Agency.

Together, the two measures end the period in which agencies could treat umbrella compliance as somebody else's problem. Vetting, payslip audits, contractual protections and ongoing monitoring are now core commercial disciplines, because the tax risk sits with you.

Primary sources:

• HMRC guidance on PAYE rules for labour supply chains that include umbrella companies from 6 April 2026
• GOV.UK policy paper on umbrella company market changes to Income Tax rules
• Finance Act 2026 on legislation.gov.uk
• HMRC guidance on reducing your risk of using a non-compliant umbrella company

Why This Matters

The government estimates around 700,000 people work through roughly 500 umbrella companies in the UK, and the policy paper puts the number of affected agencies at around 30,000. The measure is forecast to protect around £715 million of Exchequer revenue in the 2026 to 2027 tax year alone.

The new liability is strict. The legislation contains no statutory due diligence defence, so an agency that carried out checks in good faith can still be pursued for the full unpaid amount. Due diligence reduces the chance of a failure happening in the first place; it does not remove the liability if one does.

For businesses that hire agency labour directly through an umbrella company, the same rules apply to them as end client. Anyone using umbrella arrangements now needs documented procedures, not informal assurances.

1. How Umbrella Arrangements Work

In a typical chain, an end client engages a recruitment agency to supply temporary workers. The agency then contracts with an umbrella company, which employs the workers, runs payroll and pays them after deductions. The agency pays the umbrella an assignment rate that covers the worker's gross pay plus employer costs and the umbrella's margin.

Until April 2026, the umbrella company alone was responsible for operating PAYE. Non-compliant operators exploited that position through disguised remuneration schemes, skimmed deductions and phoenixing, leaving workers with unexpected tax bills and HMRC with losses it often could not recover.

The Finance Act 2026 answers that by attaching the liability to parties with assets and reputations to protect. The umbrella can still run the payroll, but the risk no longer stops with it.

2. The PAYE Joint and Several Liability Rules From 6 April 2026

New sections 61Y to 61Z2 of ITEPA 2003 apply to payments made on or after 6 April 2026. Where a worker is supplied through an umbrella company, each "relevant party" is jointly and severally liable, alongside the umbrella, for any amount the umbrella should have paid under PAYE on qualifying payments.

The relevant party is the agency that holds the contract with the end client to supply the workers. Where several agencies sit in the chain, liability attaches to the one contracting with the end client, not to intermediaries further down. If no agency is involved at all, the end client itself is the relevant party.

Joint and several means HMRC can pursue any liable party for the whole debt. In practice it will go where the money is, which will usually be the agency. Recovering a contribution from the umbrella or other parties afterwards is a civil matter between them.

The rules also catch "purported umbrella companies" under section 61Z1, so arrangements dressed up to look like umbrella employment cannot sidestep the regime. National Insurance is brought into line through regulation-making powers under section 4A of the Social Security Contributions and Benefits Act 1992, so Class 1 contributions follow the same pattern as Income Tax.

3. The Employment Rights Act 2025 Changes and Fair Work Agency Enforcement

The Employment Rights Act 2025 amends the definition of "employment business" in the Employment Agencies Act 1973 to include the handling of a worker's pay. That single change brings umbrella companies within the regulatory framework that already governs agencies, including the Conduct Regulations 2003.

The government's factsheet confirms the aim: people working through an umbrella company should have comparable protections to those engaged directly by an employment business. Regulation is expected to take effect in 2027, once the government has consulted on which Conduct Regulations should apply to umbrella companies and how.

Enforcement will sit with the Fair Work Agency, which launched in April 2026 and absorbed the Employment Agency Standards Inspectorate. Until now, the state enforcement body could not act on an agency worker's complaint against an umbrella company. From 2027, it will be able to.

4. What Good Due Diligence Looks Like

Umbrella vetting. Before adding any umbrella to your preferred supplier list, check its Companies House record for financial position, trading history and registered location, and confirm they match what you have been told. Check HMRC's published list of named tax avoidance schemes, promoters, enablers and suppliers. Treat offshore structures, financial incentives for referrals and take-home pay promises above normal PAYE levels as disqualifying red flags.

Payslip audits. HMRC's guidance recommends comparing payslips obtained from the umbrella with those received by workers, to confirm PAYE is operated on the full amount the worker receives. Sample payslips regularly, reconcile them against the assignment rates you paid, and question any gap between the two.

Contractual protections. Build compliance into the contract. Require the umbrella to supply payslips and evidence of PAYE remittance on demand, prohibit subcontracting of payroll without written consent, include indemnities from the company and its directors, and reserve the right to terminate immediately for compliance failures. Indemnities will not stop HMRC pursuing you, but they preserve a route of recovery.

Ongoing monitoring. Due diligence is not a one-off onboarding exercise. Repeat checks on a fixed cycle, obtain periodic compliance attestations, watch for changes of ownership or bank details, and give workers a clear route to report pay discrepancies. A shrinking, well-audited preferred supplier list is easier to defend than a long informal one.

5. Worker-Facing Duties and Key Information Documents

Agencies have owed transparency duties to work-seekers since 6 April 2020 under regulation 13A of the Conduct Regulations. Every new agency worker must receive a key information document before terms are agreed.

Where an umbrella company is involved, the document must set out how the arrangement affects pay, including the assignment rate, the deductions the umbrella will make (such as employer National Insurance, the Apprenticeship Levy and the umbrella's margin) and an illustration of expected net pay. GOV.UK publishes a template specifically for umbrella arrangements.

These documents take on new weight from 2027, when the Fair Work Agency gains direct reach over umbrella companies. Inaccurate or missing key information documents are an easy first target for inspectors.

Umbrella Company Rules at a Glance

What Agencies Must Do

1. Map your supply chain. List every umbrella company your workers are paid through, including any introduced by second-tier agencies, and identify where you are the relevant party.
2. Vet every umbrella against written criteria. Companies House checks, HMRC's named avoidance list, references and payroll sample testing, recorded and dated before first placement.
3. Amend your contracts. Add audit rights, payslip and remittance evidence obligations, director indemnities, a bar on payroll subcontracting and immediate termination rights for non-compliance.
4. Audit payslips on a rolling cycle. Reconcile a sample of worker payslips against assignment rates each quarter and investigate any unexplained difference.
5. Consolidate your preferred supplier list. Fewer, better-audited umbrella partners reduce exposure and make monitoring workable.
6. Issue accurate key information documents. Make sure every umbrella arrangement is reflected correctly, including all deductions, before terms are agreed.
7. Prepare for 2027. Track the conduct regulations consultation and build umbrella oversight into your compliance policies now rather than retrofitting it later.

Common Errors to Avoid

• Relying on accreditation badges alone. Industry accreditation is useful evidence but carries no statutory weight; HMRC can still recover unpaid PAYE from you in full.
• Assuming due diligence is a defence. The regime is strict liability. Checks lower the chance of a failure, but they do not extinguish the debt if one occurs.
• Ignoring arrangements introduced by other agencies. If you hold the contract with the end client, you are the relevant party even where another agency selected the umbrella.
• Chasing the cheapest umbrella quote. Margins that only work through under-declared PAYE become your liability, with interest and penalties on top.
• Skipping or templating key information documents. Missing or inaccurate documents breach regulation 13A and invite Fair Work Agency attention.
• Waiting for the 2027 rules to firm up. The PAYE liability is already live; the conduct regime only adds to it.

How the Rules Are Enforced

On the tax side, HMRC enforces the new chapter through its normal PAYE recovery powers. It can assess any relevant party for the full unpaid amount, with interest and penalties where appropriate, and section 61Z2 allows disclosures to persons who are or may become liable so they can understand the debt being pursued.

Because there is no reasonable excuse defence in the legislation, disputes will centre on whether the rules applied at all, not on whether the agency behaved well. That makes prevention, through supplier selection and monitoring, the only real protection.

On the employment rights side, the Fair Work Agency holds powers to inspect premises, require production of records, issue notices of underpayment and bring employment tribunal proceedings on a worker's behalf. Once the 2027 changes commence, those powers will extend to umbrella companies themselves, and agencies can expect supply chain questions during any inspection.

How Policy Pros Can Help

Policy Pros drafts the documents that turn these obligations into working procedures. Our recruitment and selection policies can incorporate umbrella vetting criteria, preferred supplier list controls and payslip audit procedures tailored to how your agency actually operates. For businesses engaging contractors directly, our IR35 and off-payroll workers policies cover the status assessment and supply chain checks that sit alongside the new PAYE rules.

The Fair Work Agency is already reshaping enforcement across the temporary labour market. Our Fair Work Agency employer guide explains its powers and priorities, and our guide to preparing for January 2027 employment changes sets out the wider Employment Rights Act timetable your compliance planning should follow.

If you run an agency or rely on agency labour, we can review your existing supplier documentation and produce the due diligence procedures, contract schedules and worker-facing documents the new rules demand. Get in touch for a fixed quote.