Finance Bill 2025-26: New Rules for Umbrella Companies and Client Liability

Finance Bill 2025-26: Key Changes to Umbrella Company Regulations

In a significant move to address tax evasion and non-compliance, the UK government has unveiled the Finance Bill 2025-26, which introduces new rules imposing Joint and Several Liability (JSL) on clients of umbrella companies. The draft legislation was released by His Majesty’s Treasury (HMT) and is set to come into effect on April 6, 2026. This package is expected to raise £2.8 billion, including £800 million in the 2026/27 fiscal year.

The key change centers around the responsibility of recruitment agencies and clients in the labour supply chain. Under the new rules, recruitment agencies that have direct contracts with clients will be held accountable for PAYE (Pay As You Earn) tax obligations on payments made to umbrella company employees. In cases where there is no agency involved in the supply chain, the client directly contracting with an umbrella company will assume liability for the payroll taxes.

A More Defined Role for Umbrella Companies

One of the notable aspects of the new legislation is the statutory introduction of the term “umbrella company,” a business model that provides workers with employment while engaging them through agencies for temporary assignments. The Finance Bill defines an umbrella company as an entity that supplies labour to clients, regardless of whether it generates a profit.

Additionally, the Bill introduces the concept of a “purported umbrella company.” This provision seeks to tackle situations where an entity masquerades as a legitimate umbrella company but fails to meet its tax obligations. If a client or agency unknowingly engages with such a “purported umbrella,” they can be held responsible for any unpaid payroll taxes.

Industry Reactions and Potential Impact

The draft legislation has been met with mixed reactions from the contractor industry. While many contractors and industry professionals anticipated the shift toward JSL, there are concerns about the broader implications. Some experts believe that agencies heavily reliant on umbrella companies, particularly those that use them to manage payroll and tax obligations, may face significant challenges. These changes could lead to a consolidation of the umbrella company market, and agencies may need to reassess their relationships with providers to avoid potential financial risk.

David Harmer, a director at Markel Tax, emphasized that the new rules would likely require agencies to re-evaluate their umbrella partners to ensure compliance and safeguard against financial liability. “If you're an agency thinking this will be a massive change, it could mean you're working with the wrong umbrella company,” Harmer warned.

A Shift in Recruitment Practices

The impact of the Finance Bill is not just about compliance—it also signals a potential shift in recruitment practices. Recruitment agencies may need to adjust their operational models, especially as the use of umbrella companies becomes less attractive for both clients and workers. The introduction of JSL could prompt a return to personal service companies (PSCs) and self-employment, as clients may seek to mitigate risks associated with umbrella companies.

The new rules are a direct response to concerns about tax avoidance schemes that have plagued the umbrella company market. As Chancellor Rachel Reeves noted, the aim is to close loopholes that allowed some umbrella companies to evade tax obligations and provide workers with inadequate protection.

Preparing for Change

As the legislation moves toward implementation in April 2026, industry professionals are urging recruitment agencies and businesses that rely on umbrella companies to take proactive steps to ensure compliance. This includes reviewing their supply chains, auditing umbrella partners, and preparing for the legal and financial shifts associated with the JSL rules. Experts warn that waiting until the last minute could lead to compliance failures, echoing lessons learned from past tax reforms such as IR35.

In conclusion, while the Finance Bill 2025-26 represents a significant change for umbrella companies and the wider contracting market, the new Joint and Several Liability rules aim to protect the tax system and ensure that all parties in the labour supply chain are held accountable. Agencies and clients will need to carefully navigate these changes to avoid exposure to substantial financial risks.