Finance Bill 2025-26: Draft rules to tackle umbrella companies unveiled

The government has unveiled a largely expected legislative package to impose Joint & Several Liability (JSL) on the clients of umbrella companies.

In a new Finance Bill 2025-26 note yesterday, HMT says recruitment agencies will be accountable for PAYE on the payments to umbrella company employees.  

Five pages of draft legislation show that the agency with the “direct contract” with the client to supply the worker is accountable if there are multiple agencies.

‘Chapter 11 ITEPA rules’

And under the new “Chapter 11” rules at Part 2 of ITEPA 2003, where there is no agency in the labour supply chain, the responsibility falls to the client.

Announced at Autumn Budget 2024, the Chapter 11 rules, or ‘JSL rules,’ will raise £2.8billion for the exchequer, including £800m in 2026/27.

His Majesty’s Treasury (HMT) confirmed yesterday that the Chapter 11 rules will come into force from Monday April 6th 2026.

Eleven contractor organisations had asked chancellor Rachel Reeves to defer the rules until 2028.

‘Umbrella company, and the purported umbrella’

Other than the deferral not going ahead (“This measure will have effect from 6 April 2026”), the JSL rules are largely what the contractor industry wanted -- and expected.

However, they do introduce a new statutory definition of “umbrella company.”

And they introduce the new concept, in law, of a “purported umbrella company.”

‘Joint and several liability for clients of umbrella companies’

“[Mostly] the legislation looks to be fairly straightforward,” David Harmer, a director at Markel Tax, began in a statement last night to ContractorUK.

“[As expected], the government has committed to joint and several liability for clients of umbrella companies.

“And it has taken steps to safeguard against [the JSL rules] unwittingly pulling into scope Personal Service Companies (PSCs) and other contracting methods.” 

‘Relief, as L-Day didn’t produce any shocks’

Ciaran Woodcock, a director at SG Umbrella, is also pleased at not being wrongfooted yesterday, even if the draft legislation didn’t drop until 17.30.

“At a glance, it doesn’t look like ‘L-Day’ has produced any shocks. [It] has confirmed what most in the industry expected -- Joint and Several Liability.

“There will be more details to explore tonight…[but] for those who have been operating compliantly…this will bring with it a huge sigh of relief.”

‘Finance Bill 2025/26’s announcements somewhat expected’

James Reardon, employment tax director at Crowe UK, said: “Many announcements in the draft Finance Bill 2025/26 were somewhat expected.

“[Including] the introduction of joint and several liability [from 06.04.26 for] end-clients or agencies, in cases of non-compliance by umbrella companies.”

Pulse Solutions CEO Joe Taffurelli echoed: “On first read [of the draft Finance Bill measures for umbrella companies] it appears there are no shockers in here.   

“[The] key takeaway is that government is moving forward with Joint and Several Liability, as expected.”

‘Significant impact’

Online, some contractor service providers claim the draft JSL rules will have “significant impact,” including even before April 2026 (as HMT says it will raise £75m in 2025/26).

The taxman similarly sounds like a historically important corner has been turned.

In a newly published policy paper, “Umbrella companies — tackling non-compliance in the umbrella company market,” HMRC said:

“[JSL] will allow HMRC to pursue an agency in the first instance for any payroll taxes that a non-compliant umbrella company fails to remit to HMRC on their behalf.

“The end-client will be liable if contracting directly with an umbrella company.”

‘Recruitment agencies partnering with the wrong umbrella companies’

But at SG Umbrella, Mr Woodcock moved to put the rules into context:

“If you’re an agency reading this thinking, ‘it will be a massive change,’ then you have been partnering with the wrong umbrella companies.”

Kevin Barrow, partner at Osborne Clarke, said: “The more interesting stuff will be the impact on some staffing companies who have relied on umbrellas.

“[And relied on them] not just to calculate and administer payroll but also to provide cash flow funding and…in some cases, [provide] more or less unfeasible tax avoidance schemes -- without which they would struggle to attract workers or offer competitive pricing”.

‘Will some umbrella company-reliant agencies even survive?’

Posting a long list of questions that the JSL rules seem to pose, solicitor Mr Barrow asked: “Will an indirect effect of the legislation involve market consolidation?

“Will staffing companies whose business model is too reliant on certain types of umbrella survive?”

Number Mill, an umbrella company, was plain-speaking in its alert to agencies that if their brolly partner doesn’t pay HMRC the right amount, their staffing firm is the frame.

“From April [6th]2026, recruitment agencies -- or clients where no agency is involved -- will become legally liable for PAYE and NICs where workers are paid via umbrella companies.

“Yes,” continued Number Mill founder Lousie Rayner, “that means your business is on the hook — not just the umbrella.”

‘Most significant HMRC compliance reform for years’

Rayner believes JSL is the “most significant compliance reform in years,” but “it’s not just about staying out of trouble; it’s about future-proofing your business.”

“If you engage workers via umbrella providers, you must act now [by taking these four steps],” she advised.

“Review your PSLs; audit your umbrella chain, train your teams and [fourth], prepare for liability shifts.”

‘Legal Liability List (LLL) -- no longer PSL’

But at SG Umbrella, the thinking is that JSL could even force a change of wording to one of the most age-old recruitment terms.

Alex Powell, SG’s head of business development, said: “Let’s stop calling it a ‘Preferred Supplier List’ and start calling it what it really is; ‘A Legal Liability List.’”

Powell agrees with Rayner on the wider point of preparation, however.

“IR35 showed what happens when you wait until the eleventh hour,” he said, addressing agencies. “Don’t repeat the same mistake.

‘Supply chain evaluation’

At JMK Group, a similar recommendation to umbrella contractors’ recruitment businesses was issued last night:

“It's never been more critical to ensure your umbrella partners are compliant, audited, and financially sound.

“Protecting your agency from significant financial risk starts with evaluating your supply chain today.”

Sam Cox of insurer UmbrellaSure says the focus on how to ‘prepare for and manage these changes’ can at least now begin, before they take effect from April 6th 2026.

‘Umbrella company definition is a person carrying on a business of supplying labour’

But Finance Bill 2025-26 will contain a new statutory definition of ‘umbrella company,’ due to be inserted at Chapter 11 61Y(1)(b).

The definition is based on a worker being employed by a third person “who carries on a business” of “supplying labour,” regardless of profit.

‘Purported umbrella company’

Quoting from the draft legislation last night, tax lawyer Rebecca Seeley Harris said the other big point of interest with the JSL draft is “purported umbrella”.

“This provision tackles scenarios where entities appear to operate as legitimate umbrella companies,” the lawyer writes in an article tomorrow, exclusively on ContractorUK.

“[But actually] the umbrella is deliberately evading tax obligations by misclassifying workers or diverting payments to avoid payroll taxes.

“If an agency or client reasonably assumes the umbrella is the worker’s employer, yet in reality, the umbrella is not genuinely employing or paying the worker correctly, HMRC will deem the arrangement as employment for tax purposes.”

Boss at Re Legal Consulting, Ms Seeley Harris will add: “The agency or end-client would then be liable for the missing PAYE and NIC.”

‘Days of using umbrellas to avoid paying tax are coming to an end’

From his LinkedIn profile, HMRC’s Pete Downing, deputy director of employment status and intermediaries policy, posted a warning by HMT’s exchequer secretary.

James Murray MP said: “The days of using umbrella companies to wilfully avoid paying hundreds of millions of pounds in tax are coming to an end.

“Tax avoidance hurts everyone else who plays by the rules, and umbrella companies who dodge their responsibilities can leave working people in a difficult position.

“That is why, since we were elected last year, we have been going further and faster to make sure everyone plays by the rules and pays the right tax.

“The new law taking effect from next year will fix the broken system that has been exploited for too long. We will make sure those responsible for paying tax do so”.

‘Umbrella companies no longer a safe dumping ground for the IR35 risk-averse’

In an “Explanatory note” on the draft JSL rules, the government says “questions about this change” or “comments on the legislation” can be emailed to umbrellacompanyevidence@hmtreasury.gov.uk.

Last night, Markel’s David Harmer told ContractorUK: “While this is only a draft, and could be subject to change, it is clear that clients of umbrella companies are squarely in the frame for liability. 

“This could have a significant impact on the contracting market, as umbrellas will no longer be a safe ‘dumping ground’ to utilise, instead of engaging with the IR35 legislation or S44 ITEPA. We could start to see a shift to clients becoming more comfortable engaging PSCs and the self-employed once more.”