Last reviewed: 4 October 2026. This guide is general information, not legal advice. PAYE rules apply across the UK; the employment law points at the end apply in Great Britain.
TL;DR
- Since 6 April 2026, the agency that holds the contract with the end client is jointly and severally liable for the PAYE of workers employed through an umbrella company. If the umbrella company underpays HMRC, HMRC can recover the shortfall from that agency.
- The umbrella company is still the employer and still runs payroll. What has changed is who pays when it gets it wrong.
- The rule covers existing supply chains too, for any payment made on or after 6 April 2026.
- HMRC expects agencies to check their umbrella suppliers: due diligence, contract clauses, payslip checks, Companies House, and HMRC's list of named avoidance schemes.
- Separately, the regulation of umbrella companies as employment businesses is planned for 2027, with no fixed date yet.
What changed on 6 April 2026
HMRC's policy paper on PAYE changes for the umbrella company market sets out the measure: it "makes recruitment agencies or end clients accountable for Pay as You Earn (PAYE) on payments to workers supplied through umbrella companies", with effect from 6 April 2026.
The legal mechanism is a new Chapter 11 in Part 2 of the Income Tax (Earnings and Pensions) Act 2003. HMRC's labour supply chain guidance describes it plainly: an agency, or the end client where no agency is involved, "has joint and several liability for making sure PAYE is operated correctly" when an umbrella company engages the workers, and HMRC "can recover any underpayment directly from the agency" (HMRC, potential implications for businesses).
The government's impact note explains the reasoning: recruitment agencies "can decide which businesses enter their labour supply chains", so the government wants the party that controls the chain to carry the risk (HMRC tax information and impact note).
Who is liable in your supply chain
HMRC's guidance, PAYE rules for labour supply chains that include umbrella companies from 6 April 2026, updated on 19 June 2026 to reflect that the rules are in force, says they apply to:
- new and existing labour supply chains;
- money paid to workers on or after 6 April 2026;
- the agency that has the contract with the end client to supply workers;
- the end client, if there is no agency involved;
- the umbrella company itself.
So in a chain of several agencies, the one facing the end client carries the liability. HMRC's labour supply chain guidance adds that the end client is liable instead where the agency is connected with the umbrella company, or where the agency is overseas.
The umbrella company does not get off the hook. HMRC is explicit that the umbrella company is "still responsible for working out PAYE for your employees correctly and paying us on time", and that it must give the agency or end client "the information they need to check you're doing this".
When the rules do not apply
According to the same HMRC guidance, the rules do not apply where the worker is:
- working through their own personal service company, where the off-payroll working rules (IR35) apply instead;
- deemed to be employed through a managed service company;
- a salaried member of a limited liability partnership;
- treated as employed by the agency under the agency legislation.
HMRC adds one caveat: a business that only purports to be an umbrella company can still bring the rules into play.
What this means for an agency, in practice
Before April 2026, a non-compliant umbrella company was mainly a risk for the worker, who could face an unexpected tax bill, and for HMRC. Now it is a balance-sheet risk for your agency. Three consequences follow.
- Your umbrella list is a credit decision. Every umbrella company on your preferred supplier list (PSL) is a party whose PAYE failures you may have to pay for.
- "The contractor chose the umbrella" is not a defence. The liability attaches to the agency in the chain, whoever picked the umbrella company.
- Offshore umbrellas were already your problem. HMRC's guidance for agencies reminds you that, under the offshore employment intermediaries rules, a UK-based agency placing a worker with a hirer is responsible for PAYE when the umbrella company is offshore, "even if you are not aware that there is an offshore umbrella company in the supply chain".
HMRC also warns that if an umbrella company runs a tax avoidance scheme, an agency that contracts with it and pays it may face an enabler penalty of 100% of the fees it received for the actions that enabled the arrangement (HMRC, reduce your risk of using an umbrella company that operates an avoidance scheme).
Umbrella company due diligence: the checklist HMRC gives agencies
HMRC's guidance for agencies lists the steps it expects. Turn them into a written process, run it before an umbrella company joins your PSL, and repeat it.
- Due diligence on the whole supply chain, following HMRC's supply chain due diligence principles.
- Understand how each worker is engaged and who pays them.
- Contract clauses with each umbrella company: audit rights, the information it must give you, and what happens if it fails to pay HMRC.
- Payslip checks, to make sure PAYE is operated on the full amount the worker receives. HMRC's umbrella pay tool can be used by an employment business to estimate what gross and net pay should be.
- Extreme caution with umbrella companies that are offshore or that offer financial incentives.
- HMRC's list of named tax avoidance schemes, promoters, enablers and suppliers.
- Companies House: check that the umbrella company's accounts, location and trading history match what you have been told.
- Educate your workers about tax avoidance schemes, so they can spot one.
HMRC also publishes examples of good practice for umbrella companies. It does not create new legal obligations, but HMRC says agencies may use it to choose which umbrella companies to work with.
Keep evidence of each check, dated. If HMRC raises a determination months later, a file showing what you checked, and when, is worth more than a good intention.
What comes next: umbrella regulation in 2027
The PAYE change is a tax rule. A second, separate change will regulate umbrella companies themselves under the employment agency rules.
- The law is passed. Section 36 of the Employment Rights Act 2025 widens the definition of an "employment business" in the Employment Agencies Act 1973 to cover anyone who employs workers supplied to act under another person's control, which is how an umbrella company works.
- The date is not. The government's Employment Rights Act timeline, last updated on 25 September 2026, lists "regulation of umbrella companies" among the measures that "will take effect in 2027", and states that "all future dates remain subject to parliamentary processes and may change".
- Who will enforce it. The Fair Work Agency, which began operating on 7 April 2026 and replaced the Employment Agency Standards Inspectorate, already enforces the agency rules.
The wider timeline for agencies is in our guide to the Employment Rights Act 2025.
Where Marvin fits, and where it does not
Marvin is a recruitment platform for perm and contract desks. It is not a payroll system and not an umbrella company audit tool.
- What Marvin does: it records each placement and assignment with its day rate, collects the contractor's monthly timesheet in days and half-days, gets client sign-off from a secure link without an account, and drafts the client invoice from approved days. An umbrella company can upload its invoice for a given assignment and month through a deposit link, so your team can reconcile it. See how it works in our guide to timesheet software for recruitment agencies.
- What Marvin does not do: it does not run PAYE or RTI, does not produce payslips, does not check an umbrella company's PAYE and does not make IR35 status determinations. Your due diligence on umbrella companies stays with your compliance process and advisers.
If you are reviewing the whole contract side of your agency, our guide to contract and temp recruitment software covers what a contract desk needs from its tools. You can also book a demo to see an assignment run from timesheet to invoice.
Frequently asked questions
Who is liable for umbrella company PAYE since 6 April 2026?
The umbrella company remains the employer and must still operate PAYE. But the agency that has the contract with the end client is now jointly and severally liable: if the umbrella company does not pay the right amount, HMRC can recover it from that agency. Where there is no agency, the end client is liable.
Does the rule only apply to new contracts?
No. HMRC guidance says the rules apply to new and existing labour supply chains, for money paid to workers on or after 6 April 2026.
If several agencies are in the chain, which one is liable?
The agency that has the contract with the end client to supply the worker. The end client becomes liable instead if there is no agency, if the agency is connected with the umbrella company, or if the agency is overseas.
Are umbrella companies now regulated like employment businesses?
Not yet in practice. The Employment Rights Act 2025 extends the definition of an employment business so that umbrella companies can be brought under the agency rules, and the government timeline lists the regulation of umbrella companies for 2027, without a precise date and subject to change.
Can Marvin run umbrella payroll or check PAYE for us?
No. Marvin does not run PAYE or RTI payroll and does not audit umbrella companies. It manages placements, signed day-rate timesheets and client invoices, and lets an umbrella company upload its invoice through a secure link, which gives you a clean record to reconcile against.
