New legislation announced making recruitment agencies or end clients jointly and severally liable for PAYE and NIC

Background

New legislation, outlined in the Draft Finance Bill 2026, which is intended to reduce non-compliance, will introduce far-reaching changes to the umbrella sector.

The existing legislation for agency workers (Part 2, Income Tax (Earnings and Pensions) Act 2003) provides for recruitment agencies to be responsible for the operation of PAYE in respect of payments to agency workers. However, if the recruitment agency uses an umbrella company to employ the worker and provide payroll services, this obligation is transferred to the umbrella company.

Whilst many umbrella companies comply with their tax obligations and provide valuable services to recruitment agencies, HMRC considers that some are used to facilitate tax avoidance and fraud. In 2022/23, HMRC data suggested that £500m was lost to the government due to disguised remuneration tax avoidance schemes, almost all of which was facilitated by umbrella companies. In addition, hundreds of millions of pounds were purportedly lost due to "mini umbrella company" fraud - the use of multiple small limited companies to exploit tax thresholds intended for small businesses. HMRC have struggled to use their existing enforcement powers because it is claimed that once HMRC start to investigate an umbrella company it is relatively easy for the individuals involved to establish a new company.

The new legislation

To address this issue, new legislation is to be introduced which will make recruitment agencies jointly and severally liable for PAYE and National Insurance Contribution (NIC) in respect of payments to agency workers, even when an umbrella company is used. This will allow HMRC to pursue a recruitment agency in the first instance for any PAYE and NIC that a non-compliant umbrella company fails to remit to HMRC.

In circumstances where the end client is in a direct relationship with an umbrella company, the end client can be held jointly and severally liable in the same way.

This legislation will be introduced in Finance Bill 2025-26 and will have effect from 6 April 2026.

In light of these changes, some agencies and end clients may decide to operate their own payroll which will increase costs and disproportionately affect smaller businesses.

In any event, companies and individuals operating in the temporary recruitment industry should familiarise themselves with the new legislation before it comes into effect. The draft legislation and background documents can be found here.

What can you do to prepare?

Recruitment agencies should:

1. carry out due diligence: conduct a detailed review on all umbrella companies with whom they have a business relationship. Carefully check the details provided by umbrella companies concerning their products. Ensure all umbrella companies used are PAYE-compliant and maintain clear, auditable, payroll records
2. review contracts: update and regularly review agreements with umbrella companies and ensure they include provisions that protect your business against non-compliance risks
3. verify credentials: request compliance certifications from umbrella companies to confirm compliance with all relevant UK tax legislation. Be cautious of working with umbrella companies that are offshore or offer financial incentives to the recruitment agency or the employees themselves
4. take independent advice: take independent professional advice if you are unsure as to whether or not an umbrella company you are utilising, or intend to engage with, is compliant
5. plan for cost increases: with rising employer NICs, reassess existing pay structures to avoid reduced take-home pay for workers
6. stay engaged: monitor government updates, including consultations, guidance and draft legislation, to ensure you are fully prepared when the new rules take effect.

By taking these steps now, businesses can safeguard their operations and ensure a smooth transition when these changes come into effect in April 2026. If you would like to discuss the coming changes or if you, or a company in your labour supply chain, are contacted by HMRC and require expert advice and assistance please contact Adam Craggs, Michelle Sloane or Daniel Williams.