New tax rules affecting umbrella company supply chains will take effect from 6th April 2026, introducing joint and several liability (JSL) for unpaid PAYE and National Insurance.
The changes introduced under the Finance Act 2026 mean that recruitment agencies and, in some cases, end clients can be held liable if an umbrella company fails to account correctly for employment taxes.
In summary: From 6th April 2026, agencies and end clients can be pursued by HMRC for unpaid PAYE and NICs where an umbrella company in the labour supply chain fails to meet its obligations. Importantly, there are no changes to the way IR35 is currently assessed.
What the new JSL rules do
As a result of the new legislation, when a contractor works for a client via an umbrella company (paid via PAYE), if the umbrella fails to pay the worker’s tax liabilities, HMRC can now recover unpaid tax not only from the umbrella company, but also from another party in the chain.
In most cases, this will be the recruitment agency. Where there is no agency in the chain, the end client may inherit the liability.
The rules apply on a strict liability basis, meaning that HMRC does not need to prove that the recruiter or client was aware of any non-compliance.
If there is a shortfall in PAYE or NICs, the “relevant party” can be pursued for the full amount.
Why the rules are being introduced
Since umbrella companies became widely used over the past 15 or so years, there has been a long history of non-compliance, with tax liabilities often left unpaid by insolvent or unscrupulous providers.
By extending liability beyond the umbrella company itself, HMRC can now ensure that any tax liabilities are recoverable by other parties in the supply chain.
As a result, recruitment agencies need to be more certain than ever that any umbrella companies on their supplier lists are demonstrably compliant and can verify that all workers’ PAYE deductions are made and paid to HMRC on time.
The IR35 legislation has not changed
The introduction of JSL has caused some confusion about its relationship with the IR35 rules.
It is important to stress that the two rules are entirely separate.
The confusion may have stemmed from the introduction of the off-payroll working rules, which led many contractors to use umbrella companies (by choice or at the insistence of risk-averse clients).
However, workers engaged through an umbrella company are employees of that umbrella and are paid via PAYE. Find out more here.
As a result, the off-payroll working rules do not apply, and there is no requirement to reassess status under IR35.
The JSL doesn’t result in any new changes or obligations regarding status determination statements or reasonable care.
Where the impact will be felt
Although there is no legal link between the JSL legislation and IR35, there is now a significant shift of risk within labour supply chains.
From 6th April 2026, recruitment agencies and clients will be directly exposed if the umbrella company they use fails to meet its PAYE obligations.
So it’s no longer a case of relying on due diligence alone.
In practical terms, recruiters now have to closely scrutinise umbrella providers, tighten which firms appear on their PSLs, and insist on real-time monitoring and reporting of deductions from their workers’ pay.
Some commentators suggest that, rather than ‘blanket banning’ limited company workers, the new rules may actually lead more clients to consider hiring limited company contractors.
You can read more about the background to the new rules on GOV.UK.