Umbrella Company Tax Risk Moves Up the Contractor Supply Chain
HMRC has explained how recruitment agencies and end clients will become responsible for unpaid employment taxes when umbrella companies fail to operate PAYE correctly, a reform affecting an estimated 700,000 workers.
HM Revenue and Customs published new guidance on 17 September 2025 setting out how joint and several liability would operate in labour supply chains that include umbrella companies from 6 April 2026.
The change targeted tax noncompliance in a market used by hundreds of thousands of temporary workers, including many IT contractors moved onto umbrella payrolls after the 2021 private sector off payroll reforms.
Under the proposed system, the umbrella company would continue employing the worker and operating its payroll. However, where it failed to account correctly for PAYE and National Insurance, HMRC would be able to pursue the recruitment agency that held the contract with the end client. If the client contracted directly with the umbrella, liability would fall upon the client.
A market covering 700,000 workers
Approximately 700,000 people worked through umbrella companies. HMRC calculated that more than one third were employed by noncompliant operators during 2022 to 2023, costing at least £500 million annually. Deloitte’s contemporaneous summary set out the figures.
The Treasury expected the reform to raise £895 million in 2026 to 2027, £740 million the following year and £635 million in 2028 to 2029. The government’s policy assessment said it could reduce harm where deducted tax was not passed to HMRC.
The September guidance applied to new and existing supply chains and to payments made on or after 6 April 2026. It stated that an agency or direct end client would be responsible for ensuring that the umbrella operated PAYE correctly and that HMRC could recover any underpayment from that organisation. HMRC’s guidance also reminded workers that the umbrella remained responsible for paying them correctly.
Recruiters expected to tighten supplier lists
The reform changed the commercial calculation for recruitment companies. Previously, an agency could select an umbrella provider while leaving the immediate payroll liability with that company. Under joint and several liability, poor selection or weak oversight could leave the agency facing the unpaid tax bill.
Deloitte predicted that recruitment businesses and managed service providers would increase their scrutiny of umbrella companies and reduce the size of preferred supplier lists. The firm expected compliant and established providers to gain market share while agencies demanded stronger evidence of payroll controls. Its analysis described a “fundamental shift” in supply chain risk.
The Low Incomes Tax Reform Group also warned that joint and several liability could “significantly change the landscape for workers.” Its September consultation response anticipated increased vetting, fewer umbrella choices and greater reluctance among agencies to use outside providers.
Some recruiters could bring payroll in house. LITRG warned that a change of employer could generate new tax codes, incorrect deductions or duplicate PAYE records. Its detailed response called for properly resourced taxpayer support.
What the reform meant for IT contractors
For contractors, the new liability was intended to reduce exposure to fraudulent or badly managed umbrella companies. It did not, however, remove the need to inspect payslips, reconciliation statements and employment terms.
Contractors were likely to see agencies insisting upon a smaller number of approved umbrellas. Workers using a preferred provider outside an agency’s list could be required to switch, while some might be transferred onto agency payroll.
The reform placed the largest risk upon recruiters and clients because they controlled access to the supply chain. It could remove noncompliant operators, although contractors faced new providers, altered payroll and reduced freedom of choice.