Key takeaway: From 6 April 2026, recruitment agencies are jointly and severally liable for PAYE and National Insurance owed by umbrella companies in their labour supply chains where those umbrellas fail to account for tax correctly. There is no “reasonable steps” defence — liability attaches regardless of how much due diligence was done on the umbrella provider. Payroll bureaus running payroll for agency clients, or operating as an umbrella themselves, need to understand what the new rules require and what their clients must do to manage the risk.
The umbrella company market has been a persistent source of non-compliance and abuse. Workers being paid on disguised remuneration schemes, umbrella companies collecting PAYE and failing to remit it, inflated expenses offsetting employment income — HMRC estimates that these practices cost the Exchequer approximately £500 million per year. The legislative response, effective 6 April 2026, is to shift liability up the supply chain.
Under the new framework, where an umbrella company is used in a labour supply chain and it fails to account for PAYE/NIC correctly, HMRC can pursue the recruitment agency that placed the worker — not just the umbrella. If there is no agency, liability passes to the end client. This is a fundamental change to the risk profile of using umbrella company arrangements, and it lands directly on practices and bureaus that run payroll for the affected businesses.
How the New Joint Liability Framework Works
The legislation defines an umbrella company broadly: any business supplying labour under a contract of employment. This potentially captures employers of record and outsourced employment structures as well as traditional umbrella companies. There are also anti-avoidance provisions that bring in arrangements resembling umbrella company structures even where the entity does not formally employ workers.
From 6 April 2026, where a worker is supplied via an umbrella company, both the umbrella company and a “relevant party” are jointly and severally liable for the PAYE and NIC obligations. The relevant party is typically the recruitment agency that sits between the umbrella and the end client. Where there is no agency, the end client becomes the relevant party.
HMRC will pursue the relevant party — the agency — directly when the umbrella company defaults, starting with the agency immediately above the non-compliant umbrella in the supply chain. Crucially, completing comprehensive due diligence on an umbrella provider does not remove this liability. The legislation does not provide a “reasonable steps” defence. Even a well-run agency that selected an apparently compliant umbrella can be pursued by HMRC if that umbrella subsequently fails to remit.
The legislation is explicitly targeted at tax compliance, not full regulation of umbrella companies — a separate regulatory regime for umbrella companies is pencilled in for 2027.
What This Means for Payroll Bureaus
For payroll bureaus running payrolls for recruitment agencies, the April 2026 changes create a new set of conversations that need to happen with clients. Agency clients need to understand their exposure, and bureaus that provide payroll services to umbrella arrangements — or that process timesheets and payslips for agencies with umbrella-engaged workers — need to ensure their workflows are clean and defensible.
The key risk areas to understand with agency clients:
Supply chain mapping. Does the agency know which workers in its supply chain are employed by umbrella companies? For multi-tier supply chains involving sub-agencies, this may not be immediately visible. Bureaus helping agencies manage payroll should be aware of whether umbrella arrangements are in the chain above or below their client.
Payslip and remittance accuracy. The PAYE liability that triggers joint liability is a failure by the umbrella to remit correctly — not just a failure to calculate correctly. For bureaus processing payroll for any entity in the supply chain, ensuring RTI submissions, payslip calculations, and HMRC remittances are accurate and timely is the baseline requirement.
Offshore entities. Where any part of the labour supply chain involves offshore entities, the risk profile increases significantly. The legislation brings onshore relevant parties into scope where offshore entities are involved.
BrightPay processes payroll accurately and submits Real Time Information to HMRC, with full calculation of PAYE and NIC for each employee. For bureaus running payrolls where umbrella arrangements are present in the supply chain, BrightPay’s audit trail of payslip calculations and RTI submissions provides a clear record of compliance at the payroll processing level.
Recommended Actions for Agency Clients
Agencies and end clients using umbrella arrangements should be taking the following steps in the wake of the April 2026 changes:
Map the supply chain. Identify every labour supply arrangement involving an umbrella company, including indirect arrangements through sub-agencies. For each arrangement, understand who the relevant party is under the new rules and what PAYE liability exposure exists.
Enhance due diligence. Although due diligence is not a legal defence, it remains a practical necessity for identifying and avoiding non-compliant umbrella providers. Enhanced due diligence on umbrella partners should include: review of PAYE and RTI compliance history, examination of payslip calculations to confirm correct treatment of employment income, and verification of NIC contributions.
Strengthen contractual protections. Contracts with umbrella companies and sub-agencies should include the right to audit payroll calculations and RTI submissions, requirements to provide compliance attestations, and provisions allowing termination where non-compliance is identified.
Monitor ongoing. Umbrella compliance is not a one-time check. Regular monitoring of payslips, payroll calculations, and HMRC remittances from umbrella partners gives agencies the best chance of identifying a problem before HMRC does.
Assess the engagement model. For agencies where the umbrella arrangement introduces unacceptable risk, moving workers onto the agency’s own payroll — processed through a bureau — removes the joint liability exposure entirely. This is not always commercially straightforward, but it is worth modelling for higher-volume arrangements.
IR35 and Umbrella Arrangements
The April 2026 umbrella reforms do not change the IR35/off-payroll working rules. Workers operating through their own personal service companies remain subject to IR35 and are not brought within the umbrella joint liability framework. The two regimes are distinct. For clients with a mix of personal service company workers and umbrella-engaged workers, the compliance framework for each group remains separate.
Frequently Asked Questions
Who is liable for PAYE if an umbrella company fails to remit from April 2026?
From 6 April 2026, both the umbrella company and the “relevant party” — typically the recruitment agency directly above it in the supply chain — are jointly and severally liable for unpaid PAYE and NIC. HMRC will pursue the relevant party directly. If there is no agency in the chain, liability passes to the end client.
Does completing due diligence on an umbrella company protect an agency from liability?
No. The legislation does not include a “reasonable steps” defence. An agency that selected an umbrella company in good faith following thorough due diligence can still be pursued by HMRC if the umbrella subsequently fails to remit PAYE. Due diligence remains important for risk identification, but it does not remove the legal liability.
Are all umbrella companies caught by the new rules?
The legislation defines umbrella companies broadly — any business supplying labour under a contract of employment. Employers of record and some outsourced employment structures may also fall within the definition. There are also anti-avoidance provisions covering arrangements that resemble umbrella structures even if the entity does not formally employ workers.
Do the April 2026 umbrella reforms affect IR35/off-payroll working?
No. Workers operating through their own personal service companies remain subject to the IR35/off-payroll working rules, which are a separate regime. The umbrella joint liability rules apply to workers employed by umbrella companies, not to personal service company workers.
What should a payroll bureau do if a client agency has umbrella arrangements in its supply chain?
Raise the issue with the client agency and help them understand their liability exposure. Ensure that payroll processing for any entity in the supply chain is accurate and that RTI submissions are timely. Encourage the agency to carry out supply chain mapping, enhanced due diligence, and contractual strengthening. For high-risk arrangements, model the cost and practicality of moving workers onto the agency’s direct payroll.
BrightPay processes payroll accurately with full PAYE and NIC calculations and RTI submissions to HMRC, giving bureaus and their agency clients a clean, auditable record of payroll compliance. Find out more about BrightPay or speak to your account manager.
