Your umbrella (company) will no longer protect you – with harsher weather on the way, what should you do now?

New rules coming into force on 6 April 2026 target users of umbrella companies by making them jointly and severally liable for the PAYE responsibilities of the umbrella company. For these users - recruitment agents and clients - who have been engaging staff indirectly through an umbrella company, the implications of the new rules are profound, requiring a clear understanding of the position and prompt action if affected.

First, some basics and background: what are umbrella companies and where did they come from? 

As generally understood in the recruitment sector, an umbrella company is a company whose sole purpose is to employ workers who perform their day-to-day work for other businesses. The workers are often on temporary assignments, with a recruitment agent involved in arranging the terms between the worker, the umbrella company, and the business. 

Occasionally, people use the term umbrella company to cover similar arrangements, e.g., a payroll agent who processes payroll and operates PAYE on behalf of an employer. But the umbrella companies these rules are concerned with are those that do more than merely facilitate payments to workers; instead, they actually function as the legal employer and become legally responsible for operating PAYE in place of (up to now) the business that benefits from the worker's services.

Like a Magritte painting, umbrella companies have proliferated in the last 25 years as changes in tax rules have increasingly circumscribed indirect working arrangements. Back in 2000, the IR35 rules were meant to prevent businesses and workers from using personal service companies to disguise an effective employment relationship. IR35 was significantly tightened in 2017 and 2021 by bolting on the "off-payroll working" rules, which transferred responsibility and risk for determining the application of IR35 from the worker to the actual client. However, a straightforward workaround has been to have the worker employed by someone other than the client – an umbrella company. 

There may be good commercial reasons for using umbrella companies that have nothing to do with disguising anything. Clearly, if HMRC had always got their tax, that would be fine, regardless of who paid it, the umbrella company or the business benefiting from the worker's services. However, HMRC increasingly saw umbrella companies as a means for businesses to evade their tax responsibilities and pass them to outfits of questionable standing, resulting in significant losses to the Exchequer.

The new rules are designed to stop this by preventing any transfer of ultimate tax responsibilities. From April, any business engaging a worker who "personally provides" services but is employed by a third person that "carries on a business of supplying labour" - this is the umbrella company - could be jointly and severally liable for the third person's PAYE responsibilities. 

There does not even have to be a direct contractual relationship between the client and the umbrella company. There could be a series of contracts, with the client at one end and the umbrella company at the other. Just so long as both are parties to a contract in consequence of which (directly or indirectly) the services of the worker are provided to the client or the umbrella company is paid. 

Companies in which the worker has at least a 5% interest are excluded, but the ability of any client to rely on this exclusion in practice renders it of less value than it seems; e.g., it does not apply if the 5% test is met but HMRC say it was only met to circumvent the rules. 

If there is an indirect contractual arrangement between the client and umbrella company – suppose the umbrella company contracted with a recruitment agency that contracted with the client - the client might think it does not need to worry. The reason for that being the letter of the new rules provides that the joint and several liability "black spot" falls only on the recruitment agency, not on the client. If there are multiple agencies, the rules put the black spot on the agency that contracts directly with the umbrella company. Once again, though, this is not quite the escape clause it seems – the client can only rely on it if the agency is both a UK resident and unconnected with the umbrella company - matters the client could find very hard in practice to substantiate.

The picture is further muddied by the concept of a "purported umbrella company" – one that does not meet some of the technical conditions that would trigger the rules but is nevertheless deemed to be in scope, e.g. either of the following: 

• The worker is not, in fact, employed by the umbrella company, but steps have been taken to create that impression 
• The worker, in fact, does meet the 5% interest test, but steps have been taken to create the impression that the worker would be receiving mainly salary (not dividends). 

Since there is no detailed definition of an umbrella company, the reach of the new rules is unclear. Could innocent 'Employer of Record' arrangements - used by overseas companies unfamiliar with the UK payroll regime and ill-equipped to operate it - be caught? The answer is: probably yes. 

The uncertainty and potential reach of the new rules is a serious concern for businesses, but is unlikely to trouble HMRC. In fact, it serves HMRC's purpose. By increasing the risk of indirect labour arrangements, the rules could push businesses toward the simplest solution: employing workers directly.

Against this backdrop, businesses should consider the following steps: 

• Ascertain all indirect labour arrangements that they are currently using.
• Investigate further if anything appears to fall under the new rules. 
• Review existing contracts with third parties. Are indemnities adequate? Do audit rights and information‑sharing provisions give enough protection? Should the contract be strengthened?
• Consider whether the business should seek assurances about the current PAYE and tax compliance procedures. Are there any procedures that will get the business sufficiently comfortable or should a different model be adopted?
• Think through the reliability of third-party accreditation – which no longer offers a defence under the new rules. 

This is not something that can be put off. We are only a short time away now, and businesses that ignore the new rules risk big tax bills landing on them.