New Umbrella Company Rule
Joint and Several Liability: New Umbrella Company Rules and What They Mean for Your Business
From 6 April 2026, changes to the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) will introduce Joint and Several Liability (JSL) within certain temporary labour supply chains.
The reforms are primarily focused on arrangements involving umbrella companies. Where umbrella companies are used to employ and pay temporary workers, liability for unpaid PAYE and National Insurance may extend beyond the umbrella itself.
If your business engages temporary workers through agencies that use umbrella companies, these changes may affect your compliance exposure, supplier oversight and risk management processes.
Understanding how your workforce is structured, and whether umbrella companies form part of your supply chain, will be critical ahead of April 2026.
What’s Changing from April 2026
The government is introducing new legislation designed to tackle tax non-compliance in the umbrella company sector. The key change is the introduction of Joint and Several Liability (JSL) for recruitment agencies.
Joint and Several Liability for Recruitment Agencies
From 6 April 2026, recruitment agencies will become jointly and severally liable for unpaid PAYE tax and National Insurance Contributions (NICs) owed by non-compliant umbrella companies they work with.
This means if an umbrella company fails to pay the correct tax and NICs on behalf of temporary workers, HMRC can pursue the end-client or the recruitment agency for the full amount, even if they were not directly responsible for the non-compliance.
This is a fundamental shift in responsibility. Previously, umbrella companies were primarily accountable for their own tax obligations. Now, agencies, and by extension, the businesses they supply, share that liability.
Who Is an “Umbrella Company” Under the Draft Legislation?
The draft legislation uses a broad definition of an umbrella company.
In simple terms, it describes an umbrella as a person or business that:
- Employs a worker; and
- Carries on a business of supplying workers to end-user clients.
This definition is wider than many businesses expect.
It does not only capture traditional umbrella companies. In certain circumstances, it may also capture recruitment agencies, depending on how workers are engaged.
To understand whether JSL may apply, it is important to distinguish between three common models.
- Traditional Umbrella Company Model
Under this model, the worker is employed and paid by an umbrella company.
The umbrella supplies the worker to the end client, often through a recruitment agency acting as an intermediary.
Where this structure is used, the umbrella falls within the statutory definition. If the umbrella fails to meet its PAYE or National Insurance obligations, Joint and Several Liability may apply within the supply chain.
- Recruitment Agency Employs the Worker
In some cases, a recruitment agency directly employs temporary workers under contracts of employment and supplies them to clients.
Because the agency both employs and supplies workers, it may fall within the statutory definition used in the draft legislation.
In this structure, liability may arise if the agency fails to meet its employment tax obligations.
- Recruitment Agency Employs the Worker
In other arrangements, a recruitment agency engages workers under a contract for services rather than employing them directly. PAYE may still be operated in certain circumstances, for example under IR35 compliance rules.
Under the current draft wording, this model does not automatically fall within the same definition of an umbrella company.
However, the precise application will depend on the final legislation and the specific contractual structure in place.
Why the Government is Making This Change
HMRC estimates that tax fraud and non-compliance in the umbrella company sector costs the Exchequer hundreds of millions of pounds annually. Some umbrella companies have exploited workers and evaded tax through practices including:
- Failing to deduct the correct PAYE and NICs
- Operating fraudulent tax avoidance schemes
- Misclassifying employment expenses to inflate worker take-home pay
- Collapsing companies to avoid paying tax liabilities
The 2026 ITEPA changes aim to close these loopholes by making end-clients and recruitment agencies responsible for ensuring the umbrella companies they work with are fully compliant.
What is Joint and Several Liability?
Joint and Several Liability means HMRC can recover unpaid tax from any party in the liability chain – not just the party that originally failed to comply.
In practice, this means:
If an umbrella company fails to pay £50,000 in PAYE and NICs, HMRC can pursue:
- The umbrella company directly
- OR the end-client that engaged them
- OR both parties together
The end-client cannot simply claim “it wasn’t our fault”, under JSL, they share responsibility for ensuring compliance throughout the supply chain.
This creates a powerful incentive for end clients to conduct thorough due diligence on umbrella company partners and continuously monitor their compliance.
Who Do These Changes Affect?
Why This Matters for Your Business
1. Direct Liability for PAYE and NI
If you engage an umbrella company or an agency that employs its workers you can be directly liable for any shortfall in tax, even if you are not responsible for the breach.
2. Supply Chain Risk
If you engage recruitment agencies that work with non-compliant umbrella companies, your workforce supply could be disrupted when HMRC takes enforcement action. Agencies facing large tax liabilities may struggle to continue operating, affecting your ability to access temporary workers when you need them.
3. Increased Costs
Compliant umbrella companies and recruitment agencies will need to invest in stronger due diligence, monitoring systems and compliance processes. These costs may be reflected in higher fees or margins passed through the supply chain.
4. Due Diligence Requirements
Businesses are increasingly expected to demonstrate they’ve taken reasonable steps to ensure their labour supply chain is compliant. Working with non-compliant providers creates reputational risk and potential scrutiny from HMRC.
5. Compliance as a Competitive Advantage
Businesses that prioritise working with compliant, transparent recruitment partners will be better positioned to manage risk, maintain workforce stability and demonstrate responsible supply chain management.
Red Flags: How to Spot Non-Compliant Umbrella Companies
Not all umbrella companies operate to the same standards. Here are warning signs of potential non-compliance:
What End-Client Businesses Should Do
- Ask Questions of Your Agencies
When engaging with recruitment agencies ask if they directly employ their workers. If so, you need to consider both their compliance and their financial strength. If they become insolvent you can be liable for unpaid tax.
You should also ask about their umbrella company due diligence processes:
- Which umbrella companies do they work with?
- What accreditations do those providers hold?
- How do they monitor ongoing compliance?
- What happens if a compliance issue arises?
- Review Your Supply Chain
Understand how temporary workers in your business are employed. If umbrella companies are involved, ensure your agency partners are taking JSL seriously and working with compliant providers.
- Prioritise Compliant Partners
Choose recruitment agencies with strong compliance frameworks and transparent supply chains. The cheapest option may carry hidden risks.
- Document Your Due Diligence
Keep records of the compliance questions you’ve asked and the assurances you’ve received. While you’re not directly liable under JSL, demonstrating you’ve taken reasonable steps to work with compliant partners protects your business reputationally.
Looking Ahead: What This Means for the Labour Market
The introduction of JSL represents a long-term shift toward greater accountability across the temporary worker supply chain. Businesses should expect:
Market consolidation – Non-compliant umbrella companies will be forced out, leaving a smaller pool of verified, compliant providers.
Higher compliance standards – Both agencies and umbrella companies will invest more heavily in systems, processes and accreditations to demonstrate compliance.
Increased transparency – Clients will demand, and receive, clearer information about how their temporary workforce is employed and taxed.
Potential cost increases – Compliance investments and risk management may be reflected in higher fees, though these should be offset by reduced risk of supply chain disruption.
For businesses that prioritise compliance and work with trusted partners, these changes will strengthen the integrity of the temporary labour market and provide greater certainty.
How The Best Connection Can Help
Navigating the 2026 ITEPA changes and ensuring your temporary workforce supply chain is fully compliant doesn’t have to be complex. As your recruitment partner, we take compliance seriously:
Transparent Processes – Clear documentation, robust due diligence and ongoing monitoring ensure you’re protected
Expert Guidance – Our teams stay ahead of legislative changes and ensure your workforce solutions remain compliant
Trusted Partnership – We manage the complexity so you can focus on running your business with confidence
Contact your local branch to discuss how The Best Connection can support your workforce planning with compliant temporary recruitment solutions, ensuring you work with trusted, fully compliant supply chain partners.
Contact us today.
Call: 0121 504 3090
Email: sales.enquiries@thebestconnection.co.uk
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About The Best Connection
The Best Connection is one of the UK’s leading providers of temporary workforce solutions. For over 35 years, we have proudly served and supported our clients and candidates across multiple industry sectors, delivering our best-in-class customer service.
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