UK employers review umbrella supply chains as PAYE risk shifts

New rules affecting the use of umbrella companies are now in force. From 6 April 2026, under section 24 of the Finance Act 2026, responsibility for PAYE compliance risk in labour supply chains involving umbrella companies has shifted. In most cases, that responsibility now sits with the recruitment agency that contracts directly with the end client, and where there is no agency, the liability moves to the end client itself. The legislation also introduces joint and several liability, meaning HMRC can recover unpaid tax from the agency or end client even where the umbrella company is at fault. For employers, this is prompting a closer look at how temporary workers are engaged and, in particular, where umbrella companies sit within the supply chain. We’ll speak to a tax expert about that. 

For HR teams, the issue is less about the detail of the tax rules and more about where risk now sits within the organisation. Employers are auditing their workforce and supply chains to identify where umbrella companies are used, whether directly or through one or more agencies, and establishing who holds the contractual link to the end client because that determines where the statutory exposure will usually fall.

Alongside that, employers are reviewing contractual arrangements with agencies and umbrella companies, focusing on warranties, indemnities, and due diligence processes to manage exposure to PAYE, National Insurance, interest, and penalties. This is also becoming a cross-functional issue, with HR, Tax, Legal and Procurement working more closely together to ensure there is clear oversight of labour supply chains and that only compliant and reputable providers are used.

So, from an HR perspective, what are the key risks businesses need to be thinking about when engaging workers through umbrella companies, particularly where there is no agency in the chain? Earlier I caught up with tax expert Penny Simmons, who joined me by video link, and I put that question to her:

Penny Simmons: “The key risk from an HR perspective? It’s a good question. HR and Tax, I appreciate they're different, but the key risk is that if a business is engaging with workers through an umbrella company directly, then that business is going to be joint and severally liable for the PAYE taxes, the employment taxes, of those workers. Well, that could be a significant issue, a significant risk, for the HR team because we know, Joe, that in a number of cases when the Revenue first looks into unpaid PAYE debts they actually go to the HR team, or the HR contact, rather than to Tax or Procurement or Legal. So this directly affects HR professionals and if the Revenue is going to look into unpaid debts, it is very possible that the first port of call, the first point of communication that the Revenue has with the business, is through the HR lead so it's a live risk for HR directors at businesses.”

Joe Glavina: “Whilst these rules are now in force, many employers are still getting to grips with them, so what should HR teams be doing now, particularly where there’s no agency in the chain?”

Penny Simmons: “Great question. So yes, we don't have a huge amount of time, but we do have time, I think is what I would be saying. It’s the same with all the changes to employment taxes that we've talked about, particularly obviously IR35 in the past, in the last few years. The first thing to do, really, is that the HR teams need to communicate with Legal and Tax, and Procurement because often temporary workers are actually engaged by Procurement, and to have that conversation as to I hear there's changes to tax rules involving umbrella companies. What do we do about that as a business? How do we engage with umbrella companies? Do our recruitment agencies engage with umbrella companies? So start having that conversation now. Exactly the same with recruitment businesses. I'd expect them to be having those conversations as to where do we engage umbrella companies? Which umbrella companies do we engage with? One businesses have looked at where they're engaging with umbrella companies, directly or indirectly, I would then expect that they consider, and I strongly recommend this, that they consider reviewing their engagement terms. So they need to review their engagement terms where they're engaging directly with umbrella companies and actually consider, do they want to continue to engage directly with umbrella companies from next April? They also need to be reviewing their engagement terms with agencies and make sure that there are appropriate safeguards, but also that they're making sure that their agencies are doing appropriate due diligence of umbrella companies where umbrella companies might be in the chain because even if they are engaging indirectly through a recruitment business the reality is, from a reputational perspective, businesses want to be engaging, and need to be engaging, and should be engaging, with reputable suppliers that are tax compliant and pay their taxes and are ethical and do the right thing. So the reality is businesses need to have a good oversight, and that's where due diligence comes in, as to who they're engaging with in their supply chains and I think if it hasn't been done already this is another very good opportunity, and the right time, to be reviewing engagement terms and engagement processes with recruitment businesses and with umbrella companies.”

For employers, the message is clear. With the rules now in force, this is about understanding where umbrella companies sit in your labour supply chain, who carries the PAYE risk, and making sure the right controls and contractual protections are in place. If you’d like help reviewing your arrangements, or assessing your exposure, please do contact Penny – her details are there on the screen for you.

- Link to government guidance on umbrella company PAYE rules