It may seem unusual to suggest that IR35 and the 2021 off-payroll rules provide a simpler option for managing complex labour supply chains than relying on umbrella companies. However, new legislation coming into effect on 6 April 2026 makes using umbrella companies riskier when it comes to PAYE and NIC obligations.

Purpose of Umbrella Companies

Following the extension of the off-payroll working rules (commonly called IR35) in 2021, many agencies and clients adopted cautious strategies, requiring contractors operating through  limited companies to work via umbrella companies, which would handle payroll and pay the worker under PAYE arrangements. For tax purposes, these workers became employees of the umbrella company, and the complicated IR35 provisions relating to disguised employment, issuing status determination statements, and facing PAYE and NIC liability risks no longer applied. Unfortunately, many umbrella companies failed to meet their PAYE responsibilities.

Upcoming Changes

From 6 April, the new rules will establish joint and several liability (“JSL”) for PAYE and NICs which have not been paid by an umbrella company. This means other parties in the supply chain may be held responsible if an umbrella company doesn’t comply with their tax obligations. 

Who will be liable under JSL?

UK recruitment agencies supplying umbrella-employed contractors to their end clients will be liable for unpaid tax and NICs by an umbrella they contract with. When there’s no UK based recruitment agency involved in the supply chain, the liability will pass to the end client if the umbrella company fails to pay HMRC.

This legislation is broadly defined; “umbrella” will include other third-party employment arrangements such as Employers of Record and Professional Employment Organisations.

To put it simply: HMRC will pursue the recruitment agency or end client for payment if the umbrella company defaults.

Implications for Recruitment Agencies and End Clients

You will need to properly evaluate and manage the JSL risk in any supply chain involving an umbrella. This involves:

• Performing thorough due diligence on umbrella companies you contract with, ensuring they are capable of meeting PAYE liabilities.
• Conducting compliance checks to confirm umbrellas are paying all PAYE owed, including obtaining RTI payroll reporting evidence, there is no defence of “reasonable care”
• Updating contracts with robust indemnities and audit rights for payroll data, proof of payments to HMRC, and other key compliance information.

These requirements apply to payments made to workers from 6 April 2026 onwards. For further details, HMRC has released draft guidance to clarify how the JSL provisions operate.