In the recent Budget, Chancellor Rachel Reeves confirmed what many in the labour supply chain had been anticipating: sweeping new measures to tackle tax avoidance in the umbrella sector. After the Finance (No. 2) Bill completed its First Reading on 02 December 2025, it formally introduced the long-trailed Umbrella Tax Avoidance Legislation - new Chapter 11 of ITEPA - which will take effect from April 2026.
The legislation aims to eliminate an estimated £1bn of tax avoidance within the unregulated umbrella market by making recruitment agencies and hiring firms jointly and severally liable for unpaid PAYE and NIC where an umbrella fails to pay. It represents the most significant structural shift to contingent-labour compliance in a generation.
The Bill’s accompanying Explanatory Notes explained that the purpose of the new legislation is to “…drive behavioural change among businesses that use umbrella companies in the supply of workers by giving them a financial stake in the compliance of the umbrella companies that they use.”
Dave Chaplin, CEO of ContractorCalculator, says: “Before 06 April 2026, umbrellas acted as a safe harbour for agencies and firms, but they now introduce considerable risk that must be managed. Without cast-iron preventive measures, umbrellas will move from panacea to pariah.”
What is the new Umbrella Legislation?
The new rules are built around a simple premise: if the umbrella fails to pay PAYE, the agency or end client must pick up the Bill, automatically, with no defence.
In a piece published by Global Recruiter, Jonathan Athow, HMRC’s Director General for Customer Strategy and Tax Design, set out HMRC’s rationale. Unscrupulous umbrella operators have facilitated large-scale tax loss: hundreds of millions annually, including £500m lost to disguised remuneration schemes in 2022–23 alone, with hundreds of millions more lost to mini-umbrella company fraud. Over 275,000 workers were engaged through non-compliant umbrellas in the same period.
To stop this, HMRC is introducing Joint and Several Liability (“JSL”) for umbrella arrangements. Under JSL:
- Liability attaches to the recruitment agency supplying the worker to the end client. If no agency exists, or if the agency hiring the worker is connected to the umbrella, the liability is also held by the end client.
- The central question is “Has the tax been paid?” - not whether the agency performed due diligence.
Crawford Temple, CEO of Professional Passport, echoed HMRC’s clarity in his piece, also published by Global Recruiter, highlighting that when asked in a recent HMRC webinar whether full due diligence would protect an agency from JSL if an umbrella failed to pay tax, the answer was blunt: “No.” Due diligence may help inform decisions, but it does not remove liability.
How is the freelance landscape evolving?
The introduction of umbrella JSL marks an ironic reversal in risk dynamics across the flexible workforce. For years, organisations fleeing IR35 risk pushed contractors into umbrella arrangements.
However, IR35 itself has become far more manageable due to statutory changes and events in 2024, which many firms appear to have missed. These include:
- Offsets: The 2024 Offsets Regulations (SI 2024/355) dramatically reduced disproportionate tax bills for hirers.
- Legal Clarity: The Supreme Court clarified IR35 case law in September 2024, bringing certainty.
The underlying barriers that were the leading cause of hiring difficulties for firms have been removed, and the fluctuating case law we saw for 10 years has ended, culminating in clarity from the Supreme Court in September 2024 – a case law that firms and agencies can rely on. Since the reforms rolled out to the private sector, firms have undergone compliance checks by HMRC, and many firms have passed them relatively quickly, demonstrating that solid IR35 compliance results in low risk.
IR35 risk is now proportionate, predictable and defendable.
By contrast, umbrella risk is now systemic rather than individual. Chaplin says: “Umbrella JSL now carries at least five times the liability exposure of IR35, with no statutory defence available. Agencies and clients face a rolling, never-zero liability exposure because PAYE/NICs is due after payroll is processed, creating a window in which any umbrella insolvency event can trigger JSL.”
What options are there now for agencies and firms?
Every agency must now reconsider its operating model, because the consequences of getting it wrong are severe. Regardless of due diligence, if tax hasn’t been paid, the agency becomes liable.
Agencies broadly have three options:
- Trust in an umbrella’s financial strength
- Use after-the-event checking
- Pay PAYE/NICs directly to HMRC
Some agencies may choose to work only with long-established umbrellas with strong balance sheets, possibly reducing the number from around 400 to less than 10. Chaplin says: “The small ones will fail getting through procurement purely on the balance sheet test, leaving 5-10 providers to take the majority of the market.”
Whilst some have industry accreditations, they provide no protection. Recently, we’ve seen accredited umbrellas collapse while owing millions in tax, proof that audits and badges do not prevent failure.
Likewise, pay slip-checking software and other due diligence don’t entirely prevent exposure. It can only detect problems after they occur. Such tools cannot forecast insolvency or prevent unpaid VAT or credit-term risks. Chaplin says: “An MOT doesn’t prevent a car crash, nor does checking a car after each journey - it may spot damage but cannot prevent another driver causing a collision.”
HMRC has published guidance titled “Responsibilities for employment businesses working with umbrella companies”, which it referred to in its webinar on 17 November 2025. But, when asked “If we do all the due diligence as set out in the .Gov.uk guidance and the umbrella fails to settle the PAYE fully is this an excuse for JSL?”, HMRC responded: “In the event of non-compliance by the umbrella company, the agency or end client engaging the umbrella company remains joint and severally liable in all cases. [Emphasis added].”
At the same webinar, HMRC were also asked: “If an agency can prove that it gave the monies for its workers to the umbrella, but that the umbrella did not pay the tax to HMRC, is the agency still liable under JSL?”. HMRC gave a one-word answer: “Yes.” Another attendee asked: “If the umbrella fails to pay tax due to reasons beyond the visible control of the agency (e.g. mismanagement, or deliberately does not pay the tax), will HMRC still pursue the agency under JSL?” HMRC gave another one-word answer: “Yes.”
Chaplin says: “Firms and agencies should be under no illusions about what liability they are taking on and the absence of any protection if they rely on the umbrella to pay their tax.”
Agencies paying tax directly to HMRC is the only option that offers complete certainty if umbrellas are still used, because direct payment eliminates umbrella-insolvency exposure. Agencies take control of risk rather than relying on third-party behaviour over which they have no control.
Chaplin says: “Given the seismic liability shift, many firms which mandate zero-risk supply-chain models will undoubtedly dictate the use of either direct payment models or the removal of umbrellas altogether. Agencies must therefore consider legal, operational and financial restructuring now, not in early 2026.”
How will this affect contractors?
For contractors, the changes are unequivocally protective. Under the current system, workers can be left facing large unexpected tax bills when schemes collapse - a problem HMRC openly acknowledges. The new legislation removes this risk entirely: any unpaid tax falls on the agency or client, not the worker.
This ensures contractors will not be exposed to another Loan Charge-type scandal. Workers will also benefit from a cleaner market as non-compliant umbrellas are forced out, creating a more transparent and safer working environment.
Next Steps
The introduction of the Umbrella Tax Avoidance Legislation marks a turning point. The financial consequences of a single umbrella failure could be catastrophic for a business unprepared for JSL.
Supply chains now need to:
- Seek expert legal and tax advice.
- Map all existing umbrella usage and risk exposure.
- Model alternative labour-supply structures, including direct-to-HMRC payment flows.
- Engage with clients to align on contractual frameworks.
Firms that take proactive steps now can avoid liabilities when the rules take effect. Delay may risk being caught in the contagion.