In some welcome news for the recruitment industry, this summer's change to an October 2024 Budget proposal means that staffing companies will not, as initially proposed, have sole responsibility to deduct and account for Pay As You Earn (PAYE) income tax and National Insurance contributions (NICs) on the earnings of workers engaged via umbrella companies. Instead, responsibility will be joint and several with the umbrella company. These new umbrella company tax rules will apply from 6 April 2026.
The amended proposal
In its October 2024 Budget, as part of its crack down on non-compliance in the umbrella company market, the government proposed to move responsibility for accounting for PAYE income tax and NICs from the umbrella company which employs the worker to the staffing company which supplies the worker to the end user client where there is an umbrella company in a labour supply chain: New tax burden for the recruitment services sector. Fortunately for the recruitment industry, draft legislation published on 21 July 2025 shows that it is now proposed that the staffing company and the umbrella company will be jointly and severally responsible. In practice, this should mean that a staffing company will only be responsible for paying tax and NICs on the earnings of the umbrella workers they supply to end user clients if the umbrella company the staffing company engages the workers through fails to pay.
If there is no staffing company in the supply chain and the end user client contracts directly with the umbrella company, the end user client will have joint and several responsibility with the umbrella company. Where there is more than one staffing business in the supply chain, it will be the staffing business with the direct contractual relationship with the end user client which has joint and several responsibility with the umbrella company to deduct and account for PAYE income tax and NICs on each umbrella worker's earnings. However, entities in that position, such as managed service providers (MSPs) and recruitment process outsourcers (RPOs), are likely to pass this burden down the chain in their contracts with preferred supplier staffing companies, including through the use of indemnities. Some MSPs and RPOs may even ban the use of umbrella companies and require preferred suppliers to payroll workers themselves.
Next steps
Although staffing companies will have breathed a collective sigh of relief at this news, they must nevertheless remain vigilant when working with umbrella companies. Staffing companies should continue to carry out extensive due diligence to ensure that the umbrella companies in their supply chains are not involved in non-compliant tax structures. Indemnities for unpaid tax and NICs will be useless against an unscrupulous umbrella company that can simply be wound up if it needs to escape liability. However, other contractual provisions, for example, requiring timely payment and the provision of evidence of payment of tax and NICs liabilities by umbrella companies, would be advisable.
It is intended that this new legislation will be finalised and published in November along with revised guidance. However, it seems unlikely that much will change, and so staffing companies can and should, if they have not done so already, start scrutinising their contracts with umbrella companies and amend them where necessary, as well as considering cutting down the number of umbrella companies they do business with in order to reduce their risk exposure.
Staffing companies should keep in mind that, if they continue to work with umbrella companies, failure to operate PAYE properly is a strict liability offence. This means that, if the umbrella company fails to pay, the staffing company (or the closest entity in the supply chain to the end user client) will be liable for the unpaid tax and NICs regardless of whether the staffing company has taken steps to try and ensure it only contracts with compliant umbrella companies.