Umbrella company tax compliance to shift to end user clients

The government is to introduce new legislation to combat non-compliance in the umbrella company market. As Rachel Reeves announced in her Budget last month, from April 2026 end users and agencies will take on responsibility for PAYE and NICs compliance. It’s a huge change with potentially significant cost implications so businesses will need to use the time wisely to fully prepare for this. We’ll speak to an employment lawyer advising clients on their mitigation strategy. 

A reminder. An umbrella company is an intermediary that employs individual workers to provide services to end clients. It handles administrative tasks like timesheets and billing while operating PAYE and NICs on workers’ earnings, protecting end clients and agencies from related tax liabilities. The use of umbrella companies grew significantly after IR35 reforms extended to the private sector in April 2021. Businesses often require contractors within IR35, who would be deemed employees if hired directly, to work through an umbrella company instead of their own intermediary, such as a personal service company. However, while many umbrella companies comply fully with their tax obligations, many don’t, using a variety of avoidance schemes designed to reduce their tax burden, hence the Treasury’s clampdown.

With effect from April 2026, new legislation will be introduced to change who has responsibility for accounting for PAYE and NICs where an umbrella company is used in a labour supply chain to engage a worker. The effect will be move responsibility for accounting for PAYE and NICs from the umbrella company that employs the worker to the agency that ultimately supplies the worker to the end client. Where there is no agency in a labour supply chain, the responsibility will instead sit with the end client itself. 

So what will change mean for end user clients and what should they be doing now to prepare for the change? To help with that I spoke to employment lawyer Emma Johnston who is based in the Edinburgh office:

Emma Johnston: “Well, effectively, from April 2026 it seems that what's going to happen is the responsibility for operating Pay As You Earn and National Insurance contributions is going to fall not to the umbrella companies, as is currently the case, but it's going to move to an end user, or if there is an employment agency, an employment business, in the chain then that business will be responsible for operating the payroll in that way. So basically, the net result is that where there is no recruitment agency or employment business in the chain, the end user effectively has the burden of having to operate this PAYE and NICs such that it's potentially a huge administrative burden. Effectively, the result is likely to be that one of the main advantages of using umbrella companies, i.e. to reduce the administrative burden on end clients, is going to be effectively taken away because that responsibility is moving to the end user, potentially, or the recruitment agency. So we think that's going to really change the way in which potentially businesses are engaging their flexible staff. For example, there may be less of a motivation to use umbrella companies as a result but also end users, I think, are going to look to employment agencies to say, actually, can we get an employment agency in the chain if they're not there already, so that effectively this burden falls to them to work with, rather than the end user?”

Joe Glavina: “You mention a huge administrative burden on end clients. In practice, who does that burden lie with within the business?”

Emma Johnston: “It's a really good question in terms of where the burden sits because quite often there isn't a clear idea within end clients as to exactly who's responsible. If the requirement which, which we believe to be the case based on Rachel Reeves’ announcement, is that the responsibility for operating the Pay As You Earn and the NI contributions then that that will fall through payroll. However, that’s going to be something that will have to be managed through their HR team, or recruitment team, or whichever department it is that's responsible for managing this flexible resource. So in terms of the burden, what's interesting is that, as I say, one of the main motivations for using umbrella companies is the fact that the end user can effectively push down the administrative burden and the hassle of having to operate those payments, but now that’s going to change then effectively the end user may end up with almost as much of a burden as would be the case if they engaged the individuals directly.”

Joe Glavina: “So Emma, what steps should end user clients take now to prepare for these reforms?”

Emma Johnston: “So businesses are advised at this point to review their supply chains and identify where that burden is therefore going to sit. So, as I say, if there are no employment agencies in the chain then the chances are that that responsibility is going to fall to the end client and that may well end up in a considerable additional burden. So it's a case of identifying where this liability, or this obligation, is going to sit and assess at that point the readiness of the business for those upcoming reforms because April 2026 is not particularly far away in terms of having to implement this extra resource in order to make this this possible. So assess the implications of this, check where the burden is going to lie in your supply chains and consider the possibility, where it isn't already in place, of relying on a recruitment agency, or employment business, to hopefully take on that burden instead.”

Joe Glavina: “So the net effect of the change will be a drop in the use of umbrella companies and an increase in the use of end user clients engaging workers directly, or through employment businesses. Is that the road we are going down, Emma?” 

Emma Johnston: “Yes, I think, that is the case and I think there has been a focus from the government on cracking down on what might be seen to be unscrupulous practices by umbrella companies. So this is potentially quite a deliberate move by the government to try and protect that approximate 2.8 billion pounds from being lost in tax revenue and we can anticipate that this will result in a change in behaviour from how end clients are engaging their flexible resource.”

Joe Glavina: “Will the new rules, when they come in, make it more difficult for end user clients to get their projects resourced and the work done?”
 
Emma Johnston: “Well, what it does do is it potentially further increases the cost because what might end up happening is that where previously an end client would just engage an umbrella company, now there's going to be more appetite to try and put that employment business in the chain in order to take on that responsibility for operating the PAYE etcetera. What’s interesting, of course, is that traditionally we would always see the employment businesses and umbrella companies charging a premium for the benefit of the end client no longer having this sort of administrative burden, and also for not having the risk in terms of the deductions of PAYE and NICs. So you've kind of got this situation where, yes, you’ll want to probably engage an employment business to push down that risk and that that operational burden, but you're still in a situation where additional charges are being applied if umbrella companies are in the chain, with less of a benefit, I suppose, in terms of the risk and burden factors.”

The changes to PAYE and NICs compliance are due to come into force in April 2026 so end user clients do have time to prepare for this. As Emma says, the net effect will be to potentially increase costs for businesses but there are ways to mitigate that burden. If you would like help with that please do get in touch with Emma – her details are there on the screen for you – or you can contact your usual Pinsent Masons adviser.