As expected, as part of its Finance Bill 2025-26, the government has now published full details of the legislation announced at the Autumn Budget 2024 that will make recruitment agencies accountable on payments to workers supplied through umbrella companies that employ workers on behalf of agencies and end clients.

The measure, formally published on 21 July 2025, will make recruitment agencies responsible for accounting for Pay As You Earn (PAYE) and Class 1 National Insurance (NIC) on payments made to workers that are supplied via umbrella companies. Where there is no agency, this responsibility will fall to the end client business.

Why legislate?

The move is part of the government's efforts to close the tax gap and make the tax system fairer, as well as protect approximately 700,000 contract workers who work through umbrella companies from unexpected bills. In addition, the measure is intended to restore a level playing field so that unscrupulous operators can no longer undercut compliant umbrella companies.

As explored in previous articles, the rationale for the measure is that recruitment agencies can control which businesses enter the supply chain and therefore by placing legal liability on agencies, overall compliance in the market should improve.

What are the proposals?

Legislation being introduced will make employment agencies or end clients joint and severally liable for any amount required to be accounted for under the PAYE provisions where an umbrella company forms part of a labour supply chain. Further legislation will provide HM Treasury with the power to make regulations imposing an equivalent joint and several liability for NIC purposes.

Joint and several liability 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.

In the government's summary of expected impact, it anticipates that 'some agencies or end-client businesses may decide to operate their own payroll, rather than contract with an umbrella company. In this case, individuals may see a change in the party paying them' and outlines in the policy paper the consequent changes to employment status that this would involve.

At its peak, the government expects this measure to translate into recouping £895 million for the Exchequer in 2026 to 2027, with an overall total of £2,845 billion anticipated by the end of the 2029 to 2030 tax year.

The PCA's reaction

The Payroll Compliance Authority (PCA) is supportive of the move to tackle compliance in the umbrella company market in order to protect the majority of honest and ethical operators and the contractors themselves.

PCA CEO Paul Newsham says: "Since these measures were announced last year, there have been some mixed reactions in the sector but broadly speaking this focus on tackling non-compliance in the umbrella company market is a welcome move. The unscrupulous activities at play have been allowed to continue for long enough. The current regime of accreditation has failed, and the PCA was set up to counteract the weaknesses that the government has now sought to address through regulation.

"The main concern for recruitment agencies will be to ensure without doubt that they are partnering with compliant umbrella companies. The PCA's triple audit model provides the solution and the assurance that recruitment agencies need to safeguard their businesses beyond April 2026. Umbrella companies accredited by the PCA have unequivocal third-party assurance of their legitimacy following a forensic and ongoing audit process. Furthermore, as a not-for-profit we put integrity before profit.

"The PCA has been part of discussions ahead of regulation and will continue the dialogue with various government bodies on an ongoing basis."

As a not-for-profit accreditor of fully compliant umbrella companies that have undergone a forensic audit process, the PCA offers a pathway to ethical business via its robust accreditation.