A guide to what impact the new Umbrella Legislation has on the Recruitment Sector

Changes to the Umbrella Legislation – What has brought about the changes, and what will they mean?

New Red Planet Ltd, an FCSA Accredited payroll company has prepared a brief overview of the impending new Umbrella Legislation changes and highlighted the possible impacts and benefits this has on the recruitment sector.

On July 21, 2025, the Government released the long-anticipated draft legislation addressing the shift in PAYE responsibilities for recruitment agencies supplying workers through umbrella companies.

What has brought about the changes?

This initiative aims to combat tax evasion within the umbrella sector.

These modifications stem from prior evidence gathering effort in 2021, which led to a consultation held in 2023 focusing on the regulation of umbrella companies for employment rights and strategies to address tax non-compliance in the sector.

So, what implications does this change hold?

Are you impacted by it?

What steps should you take now?

Additionally, how much time do you have to familiarise yourself with these updates?

What recruiters need to know.

The proposed Income Tax legislation issued by the government aims to hold recruitment agencies, in addition to the umbrella company, responsible for Pay As You Earn (PAYE) obligations, regarding payments made to workers supplied through umbrella companies.

In cases where there is no recruitment agency involved, the ultimate client assumes this responsibility.

This legislation establishes a framework of joint and several liability, enabling HMRC to seek recovery of payroll taxes that an umbrella company fails to remit, targeting either the agency or the end client.

This initiative is designed to diminish instances of tax non-compliance, potentially generating an additional £500 million by the fiscal year 2029-30, while fostering fairness among compliant businesses and safeguarding workers from unexpected tax liabilities.

Furthermore, the draft legislation introduces joint and several liability in cases involving so-called umbrella companies to address evasion of this responsibility.

These scenarios arise when an individual is providing services to an end-user client but does not seem to be formally employed by the umbrella company.

Employment agencies have the authority to determine which companies are permitted to join their labour supply chains, giving them the capability to block unauthorised entities from accessing the market.

The government is of the view that holding those in control of labour supply chains legally accountable for the accurate reporting of PAYE will enhance compliance within the industry.

Plus, the regulations specify that when an agency is involved, it will be regarded as the employer in cases concerning the failure to pay taxes, and HMRC will seek security from the agency for any unpaid PAYE obligations.

A draft of the legislation has been issued and will undergo a technical consultation that will continue until September 15, 2025, with the law set to come into force on April 6, 2026.

The aim of this consultation is not to decide if the provisions should be enacted, but to ascertain if the draft meets its declared goals. Additionally, this consultation can uncover any potential unintended effects.

In a different context, the Employment Rights Bill is set to introduce regulations that will subject umbrella companies to oversight by the Employment Agencies Standards inspectorate, followed by the Fair Work Agency in 2027.

The government has introduced a legislative package that was largely anticipated, aimed at establishing Joint Several Liability (JSL) for clients utilising umbrella companies.

In a recent note from the Finance Bill 2025-26 released yesterday, HMT states that recruitment agencies will bear the responsibility for PAYE concerning the wages of employees associated with umbrella companies. 

As agencies assume the tax liability going forward, those opting to maintain partnerships with umbrella companies must be persuasive in encouraging these companies to facilitate real-time monitoring and verification of actual employee payslips and, ideally, provide proof that payments have been made to HMRC.

What are the consequences and what is the meaning of joint and several liability?

Joint and several liability refers to the principle that every participant in the supply chain shares equal responsibility for any underpayment, with any one of them being accountable for the total amount owed. This implies that HMRC is permitted to seek the full outstanding sum from any party, no matter what their involvement was in causing the underpayment.

In theory, this suggests that any individual party could be held accountable for the entire PAYE underpayment associated with workers supplied by umbrella companies.  However, HMRC’s outlined policy and objectives indicate that initially, either the agency or the client will bear the responsibility for any tax deficiencies. For master vendors, the key takeaway is that the entity holding the contract with the client will carry the joint and several liability in situations involving umbrella companies within the supply chain.

Following the enactment of the new Finance Bill, it will be essential to verify that your processes align with compliance standards, as failing to do so could result in liability for any outstanding Pay As You Earn (PAYE) dues.

Additionally, there are indications that regulations concerning National Insurance contributions may also be introduced. If you are currently utilising the services of an umbrella company for your workforce, this is an opportune moment to initiate conversations with these firms regarding their procedures concerning PAYE.

All businesses dependent on umbrella arrangements should take this interim period to examine their supply chains, communicate with umbrella providers, and gain clarity on how they handle payroll compliance. It is recommended to initiate discussions early and provide sufficient time to decide upon and enact relevant action plans.

At New Red Planet, we are proactively collaborating with FCSA and our recruitment and legal partners to prepare for forthcoming changes. This will ensure we are equipped to offer clients practical advice and resources aimed at minimising risk and ensuring compliance.

Although the draft bill is not yet law, it is prudent to dedicate this time to gain a comprehensive understanding of PAYE regulations and to recognise how these rules may vary among different workforces.

What the REC says

• Continue to carry out due diligence on umbrella companies you use. REC members can access the REC’s model due diligence checklists here
• Find out how your umbrella company partners are responding to the changes to inform your next steps