Finance Bill 2025: Government to Crack Down on Umbrella Company Non-Compliance
The Government has today published draft legislation that marks a major shift in how non-compliance in the umbrella company sector is tackled. The proposed changes — set out in the Finance Bill 2025–26 — are designed to ensure all parties in the labour supply chain take shared responsibility for paying the correct tax and National Insurance.
This could have major implications for recruitment agencies, end clients, and the thousands of contractors who use umbrella companies every day. If you’re unfamiliar with how umbrella companies work, don’t worry — we break it down in plain English below.
What Is an Umbrella Company?
An umbrella company is a business that employs temporary workers or contractors who are placed on assignments by recruitment agencies or directly with end clients. Instead of being self-employed or working through your own limited company, you become an employee of the umbrella.
The umbrella company handles your payroll, deducts income tax and National Insurance through Pay As You Earn, and may also provide statutory benefits such as holiday pay, pension contributions, and sick pay. The agency or client pays the umbrella a total amount called the “assignment rate,” and from this, the umbrella deducts its margin, employment costs, and your tax before paying your take-home salary.
Umbrella companies can make life easier for contractors — but only if they operate transparently and within the law.
Why the Government Is Taking Action
While many umbrella companies operate compliantly, some take advantage of contractors by disguising income to avoid tax or failing to pass on holiday pay. In some cases, these umbrellas have shut down suddenly, leaving workers facing unexpected tax bills from HMRC.
The new legislation aims to close these loopholes by holding recruitment agencies and end clients jointly responsible if the umbrella fails to operate PAYE correctly. This should create stronger incentives to work only with trustworthy, compliant providers.
What the Draft Legislation Says
The draft Finance Bill sets out a number of key reforms, including:
Joint and Several Liability (JSL)
From 6 April 2026, HMRC will be able to pursue not only umbrella companies, but also recruitment agencies and end clients, for unpaid PAYE and (eventually) NICs, if the umbrella fails to pay correctly.
“The new legislation provides for any relevant party to be joint and severally liable… I’m delighted that it was a measure that I recommended in my independent report on the Umbrella Reforms and it was subsequently backed by FCSA. I have no doubt that this had an impact on the Government’s approach.” — Rebecca Seeley Harris
This means if a contractor’s tax isn’t paid correctly, HMRC will no longer be limited to going after just the umbrella company — they can also pursue the agency or end client involved in the arrangement.
Legal Definition of an Umbrella Company
The Bill formally defines umbrella companies in tax law — covering intermediaries, employment businesses, and any company that engages workers and pays them under PAYE. This helps close down misleading setups like “mini umbrella” schemes, where dozens of small shell companies are used to reduce tax bills unlawfully.
“We now have much needed clarity and I’m pleased that HMRC and Treasury officials and government ministers have taken on board the advice submitted by FCSA. We will continue to work with government to ensure workers are protected from payroll pirates and that compliant providers operate on a level playing field.” — Chris Bryce, Chief Executive of the FCSA
Liability Focused on the ‘Top Agency’
In supply chains involving multiple recruitment businesses, the agency at the top of the chain will generally be held responsible for any unpaid PAYE. This helps simplify enforcement and ensures the main party arranging the contract does proper due diligence.
“Chapter 11 creates a watertight JSL framework. While recruiters aren’t being deemed the employer, the policy paper’s focus on due diligence highlights the importance of tools like Diligence Hub.” — FCSA
Changes to Support Enforcement
- The Government also plans to extend JSL to National Insurance Contributions.
- HMRC will update its internal systems to simplify enforcement and avoid needing contract or ERN (Employer Reference Number) changes.
These updates are intended to help HMRC follow the money in complex supply chains and take swift action when something goes wrong.
What This Means for Contractors
For contractors, these changes offer added protection. If an umbrella company fails to pay your tax correctly, the agency or client that placed you there may now be liable. This makes it far more likely that only reputable umbrella companies will be used going forward.
However, it still pays to be cautious. You should:
- Review your payslips regularly to check your tax is being deducted correctly.
- Avoid any umbrella company that promises unusually high take-home pay (usually more than 80%-85%).
- Check if your umbrella is listed on HMRC’s named tax avoidance schemes list.
- Choose umbrella companies that are independently accredited by the FCSA or certified by SafeRec, both of which audit providers for compliance.
How Agencies and End Clients Should Prepare
With less than a year until the new rules take effect, recruitment agencies and end clients must begin reviewing their umbrella relationships now:
- Audit their umbrella Preferred Supplier Lists (PSLs).
- Remove any umbrellas without clear compliance credentials.
- Issue updated Key Information Documents (KIDs) to contractors.
- Establish clear contracts and compliance checks throughout the labour supply chain.
Agencies that continue to use risky or opaque umbrellas could find themselves facing unexpected tax liabilities after April 2026.
When Do the Rules Take Effect?
- Consultation on the draft legislation is open now, with final legislation expected to pass in early 2026.
- The joint and several liability (JSL) rules will apply from 6 April 2026.
- Further measures — including joint NIC liability — are expected in future legislation.
Stay Compliant, Stay Informed
These reforms could help remove rogue operators from the market and protect genuine contractors and clients from unnecessary risk. By tightening the rules and shifting responsibility across the supply chain, the Government aims to improve fairness and transparency across the umbrella sector.
You can view the full, regularly updated list of named avoidance schemes on HMRC’s official website, or read our breakdown here.
Looking for a Trusted Umbrella Company?
If you’re unsure whether your umbrella company is compliant, or your agency has asked you to use a provider you’re not comfortable with, we can help.
Complete our short form and we’ll match you with one of our Top 10 umbrella companies — all of which are independently vetted for transparency and compliance. You’ll receive a take-home pay illustration and the opportunity to ask questions before committing.
