United Kingdom proposes comprehensive tax legislation for companies in the staffing sector, granting a timeframe of eight months for systematic adjustment prior to implementation
The UK government has unveiled plans for a new umbrella tax regime, set to take effect in April 2026. This reform aims to address widespread abuse in the umbrella company market, particularly misreporting of income and tax underpayment, which has resulted in significant tax revenue losses.
Starting next year, recruitment agencies, end clients, and umbrella companies will share joint and several liability for unpaid Pay As You Earn (PAYE) tax and National Insurance Contributions (NICs). This means that agencies and clients will be responsible for the full amount if umbrella companies they engage fail to properly account for taxes.
This shift in liability is expected to cause substantial changes in UK labour supply chains. Agencies and clients will need to audit and monitor umbrella companies more rigorously to avoid tax liabilities, as there is no statutory defence for being deceived by or relying on accreditation of umbrella companies.
Businesses may simplify or alter their labour supply chains to reduce tax risk and liability exposure. Agencies may choose to run their own payroll instead of passing worker earnings through umbrellas to ensure compliance and manage liabilities directly. End clients, MSPs, agencies, and umbrella companies will need to rethink how payments flow through the supply chain and how contracts are structured to allocate risk and liability appropriately.
The potential reduction in the use of non-compliant umbrella companies is another significant outcome of this reform. The financial risk to agencies and clients will incentivize use of fully compliant umbrella firms or direct employment options, potentially shrinking the market for problematic umbrella operators.
However, the new regime also brings an increased administrative burden for all parties involved in temporary labour supply chains, as they will face more responsibilities regarding tax compliance, reporting, and ongoing monitoring.
The government has adopted an extremely wide definition of umbrella worker, including employees supplied via intermediaries that employ or purport to employ them. Staffing companies, end clients, and umbrella companies will be liable for any failures by intermediaries to account properly for PAYE and NICs.
Contractors who provide their services through their personal service companies (PSCs) and traditional agency workers engaged by the agency under a contract for services and paid via the agency's PAYE payroll will not be subject to the new umbrella tax regime.
Construction Industry Scheme (CIS) subcontractors who engage via so-called CIS umbrella companies are not caught by the new legislation. The agency worker tax regime will continue to apply to these arrangements where a CIS worker works subject to supervision, direction, or control.
The draft legislation for the new umbrella tax regime needs to go through further parliamentary stages and receive Royal Assent before it becomes law in April 2026, as part of the Finance Act 2025-2026. The government has published draft legislation and is open for technical consultation until 15 September.
New accreditation platforms are emerging, capable of carrying out, in real time, checks into umbrella companies' tax treatment of umbrella workers' employment income and the corresponding payments of all sums due to HMRC. However, anyone relying on these accreditations will also need to consider whether they provide a reasonable procedures defence for Criminal Finances Act purposes and ensure that the information flows these tools will involve, do not breach General Data Protection Regulation.
Umbrella companies will still be able to hold the employer's reference number, allowing them to pay workers through their own PAYE payrolls. Some accreditation platforms may be backed up by an insurance policy that the umbrella will pay for, but which will pay out to the agency or end client (whichever has the contract with the umbrella) in the event of default.
In summary, the new umbrella tax regime effective April 2026 is expected to cause substantial changes in UK labour supply chains by reallocating tax liability, prompting tighter compliance controls, restructuring of contractual arrangements, and possibly reducing the presence of non-compliant intermediaries. These changes are designed to strengthen tax collection and protect workers and the Exchequer from previous umbrella company malpractices.
- The upcoming changes in the UK tax law, scheduled to take effect in April 2026, are anticipated to prompt businesses in the industry, particularly recruitment agencies and end clients, to evaluate and possibly alter their labour supply chains in an effort to minimize tax risk and liability exposure.
- In light of the increased joint and several liability for unpaid PAYE tax and National Insurance Contributions (NICs), the finance sector may witness a shift towards direct employment options and a reduced reliance on umbrella companies, as the potential financial risk to agencies and clients will incentivize the use of fully compliant umbrella firms.
