On Monday 21st July 2025, HMRC/HMT finally confirmed their intention to introduce Joint & Several Liability (JSL) as the central mechanism to protect workers and ensure a level playing field across the umbrella company sector.

Below is a breakdown of the changes to umbrella regulations from Chris Bloor, Director of Compliance, including what they mean for recruitment agencies and end clients.

We’re also running a free webinar with the FCSA on Wednesday 30th July, explaining what all the changes mean in more detail, which we’d love you to join if you’re available.

What recruitment agencies and end-clients need to know about the new umbrella regulations

The UK government has unveiled long-awaited draft legislation aimed at tackling tax non-compliance in the umbrella company sector. Set to take effect from 6th April 2026, the proposed measures – part of the Finance Bill 2025/26 – introduce Joint and Several Liability (JSL) for unpaid payroll taxes, placing new responsibilities on recruitment agencies and end clients.

What’s changing?

Under the new rules, if an umbrella company fails to remit Pay As You Earn (PAYE) and National Insurance Contributions (NIC) to HMRC, the liability will fall on:

• The agency closest to the end client in the supply chain, or
• The end client if no agency is involved.

This marks a significant shift in accountability, designed to close the tax gap and protect temporary workers from unexpected tax bills. Now, compliance is no longer an option.

Key takeaways

Joint and Several Liability

• Introduced via Chapter 11 of ITEPA 2003;
• Applies to umbrella companies and the “relevant party” in the contractual chain;
• HMRC can pursue either party for unpaid payroll taxes;

Section 61Z: Who Is the “Relevant Party”?
Based on our current understanding, Section 61Z of the draft legislation defines the “Relevant Party” as the entity that will share liability with the umbrella company if PAYE/NIC obligations are not met. The rules are structured to ensure that liability always rests with a UK-based party as close to the end client as possible:

• If the umbrella company contracts directly with the end client, the end client is the relevant party.
  
• If there is one agency between the umbrella and the end client, that agency is the relevant party.
  
• If there are multiple agencies in the chain, the agency closest to the end client (i.e. the top-tier agency or Managed Service Provider) is the relevant party.
  
• If neither the end client nor the most direct agency is UK-resident, the closest UK-resident agency in the chain becomes the relevant party.

This structure mirrors the approach taken in Section 44 ITEPA 2003, ensuring that HMRC can always identify a UK-based entity to pursue for unpaid liabilities.

How will the new measures be enforced?

HMRC’s powers are being expanded to:

• Demand information from employment intermediaries
• Extend Regulation 80 Determinations to jointly liable third parties
• Implement IT system changes (estimated cost: £3.8 million)

Implications for the supply chain and key steps

Recruitment agencies and end clients

• Conduct rigorous due diligence
• Review supply chains and contractual indemnities
• Consolidate Preferred Supplier Lists (PSLs) to trusted umbrella partners
• Act now – Don’t leave it until April 2026.

Umbrella companies

• Can continue operating PAYE under their employer reference
• Need to demonstrate compliance via FCSA accreditation and enhanced Payslip verification processes.
• Support agencies and end clients through education and training around the requirements of the legislation.

Workers

• Greater protection from tax liabilities caused by non-compliant umbrellas

What’s next?

While the legislation is still in draft form, the direction is clear: only compliant umbrella companies will survive. Agencies and end clients must prepare now by scrutinising their supply chains and ensuring robust compliance frameworks are in place.

This represents a pivotal moment for the temporary labour market. By shifting liability up the supply chain, the government is sending a strong message: compliance is no longer optional – it’s essential.

Section 61Z ensures that there is always a clearly identifiable, UK-based party responsible for unpaid payroll taxes, closing a long-standing loophole in the labour supply chain. For compliant umbrella companies, this is a welcome move that levels the playing field. For agencies and end clients, it’s a call to action to tighten due diligence and ensure their partners are operating within the law. And for workers, it’s a step toward greater financial protection and fairness.

As we move toward April 2026, preparation will be key. Those who invest in compliance now will be best positioned to thrive in the new regulatory landscape.