The government has announced further details of the draft legislation due to be introduced in April 2026, which will tackle non-compliance in the umbrella company market. Published on the so-called ‘L Day’, if and when the legislation becomes law, it will represent a shift in Pay As You Earn (PAYE) responsibility to recruitment agencies, and signal a new era for umbrella payroll businesses.
The measures, contained within the Finance Bill 2026, are an initial step towards regulating what the government says is a troublesome part of the temporary labour market, and follows extensive and lengthy consultation by HMRC with the sector’s many stakeholders.
The government’s draft “umbrella” tax legislation will form a new chapter of part 2 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) from April 2026. And recruitment agencies, end clients, umbrella companies and contractors will all be affected.
Ultimately, the aim of the new legislation is to drive down non-compliance and protect businesses and individuals. Those that work with compliant umbrella companies will be unaffected.
What are the key points?
There is much to digest and consider within the government’s draft legislation, and we will delve into the detail in a separate article soon. In the meantime, here we summarise the important proposed amendments / additions.
The key highlights:
- Where PAYE has not been operated correctly, liability will fall on the umbrella company and agency holding the contract with the end client for the supply of the worker (i.e., the top tier agency, or Managed Service Provider).
- If there is no agency in the supply chain, the liability will fall on the end client.
- Where neither the client nor most direct agency having a contract with a client is UK resident, the closest UK agency in the supply chain will be the party liable for any unpaid debt of the umbrella company.
Additional points of note:
- The draft legislation is the first to include the term “Umbrella companies” . It broadly describes it as a company that carries on a business of employing workers to personally provide their labour to end clients. It states that the worker does not have a material interest in the umbrella company and the “umbrella company arrangements” conditions must be met.
- The umbrella company arrangements conditions are described as the contractual set-up of the supply chain; e.g., the umbrella company direct to end client, or the umbrella company to an agency.
- Along with the umbrella company, each “relevant party” is jointly and severally liable to pay any tax shortfall.
- The identity of the relevant party is explained, but essentially targets the agency that holds the contract with the client, or the client business itself where there is no agency.
- The concept of a “purported” umbrella company is introduced potentially to prevent the sidestepping ‘jointly and severally liable’ in certain circumstances, by defining the remuneration that will be treated as earnings from the deemed employment with a “purported” umbrella.
- HMRC’s powers to require the preservation and provision of information from employment intermediaries are extended, meaning HMRC will be able to bring determinations on jointly and severally liable third parties in the event of default by the umbrella company.
Visit the Gov.uk website for more information about the draft legislation here.
About us
Magic Umbrella is committed to ensuring compliance, transparency, and best practices in everything we do. That’s why we’re proud to be an Approved Partner of Professional Passport. Find out more about us on the Professional Passport website here. The Magic Umbrella Benefits Portal is an included (no charge) 24/7 access pass to a world of unparalleled benefits and support for workers and their families. It’s also the central portal to vital employment and pay documents, sending alerts when new payslips or documents are uploaded, and securely storing vital information, payslips and employment history in one place on the individual worker’s app. It also features savings and discounts at supermarkets and high street retailers, 24/7 GP access and access to hundreds of training, learning and development opportunities.
