Autumn Budget: Employment agencies to take on PAYE processing from umbrella firms from April 2026

Recruitment agencies responsible

In the meantime, the policy paper said recruitment agencies that engage umbrella company workers will be responsible for ensuring the correct income tax and national insurance contributions (NICs) are deducted from these workers’ pay packets and paid to HM Revenue & Customs (HMRC).

“This will mean that the agency that supplies the worker to the end client will be legally responsible for operating PAYE on the worker’s pay and will be liable for any shortfall, whether they operated their payroll themselves or used the umbrella company to run payroll for them,” it said.

“If there is no agency involved in the supply of the umbrella company worker, this responsibility will be placed on the end-client itself.”

The policy paper also stated that it’s not the government’s intention to prevent agencies from using umbrella companies or other intermediaries for operating payroll on their behalf, but what it does mean is they will no longer be able to outsource their underlying PAYE obligations.

Seb Maley, CEO of contractor insurance provider Qdos, said the change essentially amounts to “the government asking the wider supply chain to police the compliance of umbrella companies” and “carry the can” if tax avoidance is found to have taken place.

Crawford Temple, CEO of independent umbrella company assessment organisation Professional Passport, said the policy will “change the shape” of the contracting market, and give employment agencies some food for thought. “This move will certainly change the shape of the market, and as well as presenting a number of challenges to agencies, will also ramp up the need for robust enforcement measures in the run up to April 2026,” he said. 

“The next 18 months will undoubtedly witness a drive by the architects of tax avoidance schemes to make as much money as they can,” said Temple. “The message is clear, visible and targeted enforcement is imperative to drive up standards and drive out the cowboys giving our industry a bad name. We need action and enforcement – not pledges and promises.”

The number of IT contractors providing their services through umbrella companies has markedly risen since changes to the way the IR35 off-payroll rules work in the public sector were introduced in April 2017, before being extended to the private sector in April 2021.

These changes saw contractors cede responsibility for determining if their engagements should be classified as in-scope of the IR35 rules or not to the end-user organisations that engage them.

When contractors provide their services through payroll processing umbrella companies, they are considered employees of those organisations, meaning the off-payroll rules do not apply to them.

The growing number of contractors providing services through umbrella companies has proven to be a point of concern for many in recent years because they are unregulated entities.

Numerous umbrella companies have also been found to be operating as fronts for tax avoidance schemes in the past, which has resulted in thousands of contractors facing life-changing tax bills as a result.

According to figures from HMRC shared in the policy paper, 700,000 contractors were employed via umbrella companies between 2022 and 2023, and at least 275,000 of them were engaged at some point during this period by non-compliant umbrella firms.

“HMRC data shows that £500m was lost to disguised remuneration tax avoidance schemes in 2022 to 2023, almost all of which was facilitated by umbrella companies,” it said.