A contractor's guide to new 'umbrella company tax' legislation

Finance Bill 2025-26 has been published, and for the contractor umbrella company industry, the legislation of importance has landed, writes Chris Bryce, CEO of the FCSA (Freelancer & Contractor Services Association).

For the first time, we now have in writing how HM Treasury and HMRC intend to implement the chancellor’s Autumn Budget 2024 announcement that will bring significant changes to the contingent labour market, with effect from April 6th 2026.

Where has this Finance Bill ‘umbrella company tax' legislation come from?

As a reminder, that announcement in October 2024 was to “make recruitment agencies responsible for accounting for PAYE on payments made to workers that are supplied via umbrella companies.”

And as previously informally trailed, this shift in PAYE responsibility will be achieved by making recruitment agencies ‘Jointly and Severally Liable’ -- JSL -- for any unpaid tax.

This means that many of our biggest concerns as an industry body, with the original proposal, have been taken off the table.

However, there are a number of ways JSL could have been implemented, which have meant that, until now, we have been unable to provide any definitive response or guidance.

Introducing the Statutory Debt Transfer (Contingent Liability) Model

The approach that the government is following is the "Statutory Debt Transfer (Contingent Liability) Model," as recommended by adviser Rebecca Seeley-Harris in March 2025.

This is being implemented by the creation of the new Chapter 11 being added to the ‘Income Tax (Earnings and Pensions) Act 2003 (ITEPA).

To be clear, it is not an amendment to the existing Chapter 7 -- a possibility previously floated. It therefore creates an absolute liability for any unpaid tax debts, so while it cannot be litigated against, it can be effectively mitigated and managed.

New definition of an umbrella company

In the draft Finance Bill clauses, umbrella companies have been defined widely to include employment businesses and intermediaries directly engaging workers. This is separate from, but a similar approach to, the addition of Clause 34 to the Employment Rights Bill, which brings umbrellas within the definition of “employment business”.

Defining “purported umbrellas" appears to be designed to catch Mini-Umbrella Companies (MUCs) and fraudulent arrangements, to close compliance loopholes. 

Therefore, as Seeley-Harris, an adviser to the FCSA has observed, the new legislation provides for any relevant party to be jointly and severally liable for any amount payable under PAYE when they supply workers via an umbrella company.  

What is not changing? Thankfully, Employer Reference Number

As trailed on June 12th 2025, JSL should mean there will be no significant disruption to the operations of compliant umbrella companies.

Crucially, the Employer Reference Number (ERN) used can continue to be that of the umbrella company. Therefore, the recruitment agency’s ERN does not need to be used for tax remittance.

This also means that no software changes are required, as previously feared.

Instead, HMRC will amend their back-end IT systems, costing “in the region of”£260,000, HMRC has said. It’s a worthwhile investment that avoids ERN and employee contract changes.

Recruitment agencies aren’t the deemed employer for tax purposes

Furthermore, recruitment agencies are not being “deemed the employer for tax purposes” as previously suggested, which means that the existing overarching contract of employment for umbrella employees will not need to change either.  

This means that employees can retain:

• Continuity of employment;
• Statutory rights, and;
• Other aggregated benefits, such as a single pension pot.

Umbrella workers will continue to have a single point of contact and properly know and understand who their employer is.

What is changing?

JSL means that recruitment agencies will ultimately become liable for the full amount of any unpaid taxes that HMRC are unable to recover from the umbrella in the first instance.

If there is no agency in the chain, the debt will be owed by the end-hirer.

In the draft finance bill measures for umbrella companies, the wording “Relevant Party” appears to suggest that only the 'top agency' in the chain, i.e. the agency with the contract with the end-hirer, appears to be the only one that becomes liable if there are multiple agencies involved.

'No statutory excuse' -- what does it mean for agencies?

There will be no statutory excuse, which means recruitment businesses (or potentially the end-hirer) will assume the unpaid tax debts, regardless of whether or not they knew about the tax avoidance.

The change in law from April 6th 2026, means that there will be instances where insurance and indemnity policies may no longer apply in the same way they once did. This is a key thing for organisations to be aware of when renewing any insurance policies.

National Insurance Contributions (NICs) are NOT going to be excluded

Further legislation will amend section 4A of Social Security Contributions and Benefits Act 1992 to empower HM Treasury to make regulations imposing an equivalent JSL for NIC purposes.

Furthermore, amendments to other pieces of legislation (e.g. s.44, Chapter 10 ITEPA) to prevent the “fraudulent document condition” from applying where fraudulent documents are intended to constitute evidence.

HMRC will be able to issue a Regulation 80 determination to a jointly and severally liable party.

What about umbrella company regulation, and when?

Added to this, on 1st July 2025, the UK’s contractor industry received the Employment Rights Bill Roadmap.

The roadmap makes clear that there will be an entirely separate consultation on the regulation of umbrella companies, notably for employment rights, and this consultation will likely commence later this year, in the autumn.

The Department for Business and Trade has indicated that implementation of these regulations will be in early 2027. At which point, umbrella companies will be included within the operational remit of the new Fair Work Agency (FWA).

Therefore, umbrella companies can no longer be seen as an unregulated industry.

Recommendations for recruitment agencies facing JSL/umbrella legislation

Knowing your supply chain from top to bottom is the key.

‘Due diligence’ on an umbrella company is the only way to mitigate the risks of any surprise unpaid tax bills.

Recruiters need to know who they are working with and ensure that the umbrellas they engage with:

• Have robust processes in place to prevent mistakes;
• Are solvent and financially resilient to ensure they remain a going concern, and;
• Include PAYE reference number on payslips to prevent ‘mini umbrella’ fraud.

At FCSA, we perform all these checks on our members as part of their annual assessment.

In addition, our Diligence Hub provides quarterly updates to the compliance pack each agency requires the umbrella to complete, and the veriPAYE platform provides reassurance to agencies that their umbrellas have properly calculated workers’ payments and paid the taxes due.

Recommendations for end-hirers

In certain circumstances (notably the absence of a recruiter from the labour supply chain), any unpaid debts that cannot be recovered from parties lower down the chain could end up with the end-hirer having to cover the tax debt.

Our guidance is the same as it is for recruitment agencies.

Having confidence in the compliance of your supply chain is key. If you are working with only FCSA-accredited umbrellas and recruiters (as your partners), we believe you will have the best possible protection against these risks.

The next key step for your contractor umbrella company?

In a market where recruiters and end-hirers will have an increased focus on the compliance of umbrella companies, proving your compliance as an umbrella company will be imperative to your operations.

TLDR: JSL ‘umbrella company’ tax legislation; a good thing for contractors?

The government has listened, and we seem to be heading towards a set of solutions that should once and for all clean up the umbrella company industry.

Those umbrellas intent on running compliant and honest operations have nothing to fear -- there are, however, things you need to do to ensure and demonstrate your compliance. It matters more than ever.