The JSL nub for umbrellas/agencies: who runs PAYE and who will HMRC bill?

I wish to cut through it rather than add to it, but there is rather a lot of noise around the new ‘Chapter 11’ Joint & Several Liability (JSL) rules for umbrella companies, and how they’ll sit alongside the long-standing Chapter 7 “agency legislation” from April 2026, writes Rebecca Seeley Harris, founder of Re Legal Consulting.

The word ‘employed’ has come under scrutiny in the last few weeks because it determines whether Chapter 11 or Chapter 7 applies. The JSL legislation is also widely drafted and can now include an agency with no umbrella in the chain.

The employer, and the relevant party: unmasked

Chapter 11 ITEPA (draft Finance Bill 2025-26) covers umbrella company arrangements where the worker is employed. The umbrella stays as the employer, but a “relevant party” in the chain (usually the agency nearest the client, or the client if there’s no agency) can be jointly and severally liable for the umbrella’s unpaid PAYE.

Chapter 7 ITEPA (existing) is the agency regime, otherwise known as s.44.

JSL & Supervision, Direction or Control (SDC)

If a worker is supplied via an agency and works under Supervision, Direction or Control (SDC), the law treats the agency as the employer for tax.

The agency must run PAYE on all pay “in consequence of” the services. It allocates one PAYE operator; it doesn’t make everyone up the chain jointly liable for the same bill.

Which chapter applies? Follow the engagement, not the label

• Contract of employment (contract of service)?

With a contract of employment (contract of service), you’re in Chapter 11 territory. So it’s deemed employment with a business that supplies labour (umbrella). That’s where the new joint & several back-stop lives.

• Contract for services / “worker” contract (not employed) + SDC via an agency?

In this scenario, it’s Chapter 7. So the agency is treated as the employer for PAYE. If the payer is offshore and UK PAYE would be missed, the UK client can be forced to run PAYE under the ‘host-employer ‘rule.

Important JSL liblity nuances (that catch people out)

The legislation is drafted widely and, as such, it can apply to an agency that has a worker on PAYE and on a contract of service. 

Equally, the umbrella company can become the agency. 

Either way, where the key points below are shown, the end-client will become liable under JSL without an umbrella company in the chain. If, however, the worker is not on a contract of service, it will come under Chapter 7, where again the top agency is liable.

JSL liability: step-by-step walkthrough

The key points, in order, are:

• if the worker personally provides services to another person (the “client”) and
• the worker is employed by a third person (the “umbrella company”)
• who carries on a business of supplying labour,
• the worker has no material interest, and
• the umbrella company arrangements are met,
• then ss.61Y(2) provides that the ‘relevant party’ is joint and severally liable.

Quick definitional point

For tax, “employment” means a contract of service (plus apprenticeship/Crown employment) that’s s.4 ITEPA. The Conduct Regulations’ term “employment business” is regulatory; it doesn’t decide tax status or PAYE liability.

Anti-avoidance is baked in. Chapter 11 makes clear that “employed” for its purposes doesn’t include being treated as employed under other deeming codes (Chapters 7–10).

The purported umbrella

Plus, due to the “purported umbrella” clause, the JSL legislation blocks attempts to use bogus ‘this is an umbrella’-type paperwork to shuffle liability elsewhere under the Off-Payroll Working (OPW) rules.

In short, labels won’t rescue non-compliant structures.

Does JSL legislation expose directors?

Director exposure is a real risk, but is separate.

Under existing tools (PAYE Personal Liability Notices and FA 2020 joint-and-several notices), HMRC can pursue directors personally for certain PAYE debts/behaviours that are outside Chapter 11. But it’s still part of the real-world risk picture.

Three contractor red flags (if spotted, pause and investigate)

1. Mid-assignment status switch: being pushed from employment to a worker/contract-for-services model without any change to what you actually do or how you’re controlled, is red flag number one. Ask which chapter now applies and why.

2. Frequent changes of employer/PAYE reference with thin explanations. Such changes can be about moving the HMRC liability under JSL legislation, not improving service.

3. Umbrella says you’re still an employee, but the pay route changes

And this with the effect that not all your income looks like taxed earnings. If this happens to you, insist on a clear reconciliation:

From assignment rate → gross pay → deductions → net pay, and that 100% of taxable earnings are through PAYE.

Under JSL, here's what good looks like (for umbrellas, agencies, clients)

Umbrellas: run PAYE on all taxable earnings; provide clean payslips and assignment-rate → gross → net reconciliations.

Avoid third-party pay routing.

Expect to come under more ‘due diligence’ from agencies/clients because their J&S (Joint & Several) exposure rises under Chapter 11.

Agencies/clients: treat umbrella company selection like a critical supplier risk. Build audit rights, termination and indemnity clauses; verify RTI matches payslips and bank flows; watch for offshore/complex chains that could trigger host-employer obligations.

Everyone: remember status changes can affect employment rights (holiday, NMW, pensions, etc).

Don’t re-badge without understanding the knock-on!

And finally, why the ITEPA Chapter 11-7 combo matters…

Used properly, Chapter 11 plus Chapter 7 should push out bad actors and give compliant firms a level playing field. The next step is dedicated umbrella regulations to bring umbrellas within the Conduct Regulations, a move the sector has been expecting.