Recruitment agencies face a major change to the PAYE rules when placing workers through umbrella companies.

New legislation introduces a joint and several liability rule to tackle tax non-compliance in labour supply chains involving umbrella companies and other third parties. The measure sits within Chapter 11, Part 2 of the Income Tax (Earnings and Pensions) Act 2003 and gives HMRC a stronger route to recover unpaid PAYE and National Insurance contributions.

Under the new rules, the umbrella company remains primarily responsible for deducting PAYE and NICs from the pay of workers it employs and supplies to clients. However, where the umbrella fails to account for the correct tax, that liability can now move up the chain to the recruitment agency.

This significantly raises the risk for agencies using umbrella arrangements and is expected to affect around 30,000 recruitment agencies and 400 umbrella companies. Businesses will need to carefully review their labour supply chains, conduct more robust due diligence, and assess where potential tax exposure could arise.

The change is also expected to generate substantial extra revenue for HMRC. Treasury forecasts suggest the measure will raise an additional £715 million in 2026/27, before settling at about £600 million a year thereafter.

HMRC believes some agencies and end clients may respond by running their own payroll rather than using umbrellas. Around 700,000 people are estimated to work through umbrella companies, so the reform could have a wide practical impact across the temporary labour market.

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