Off-Payroll Workers: Changes and Challenges

Tax in the Deal 2026

Working practices in the labour market have changed enormously in recent years, with alternatives to the traditional 'employer/employee' model growing in popularity. For companies with fluctuating staffing needs, the ability to manage worker numbers flexibly can be very appealing (particularly in a challenging economic environment). Equally, some individuals are attracted to a less rigid working pattern than formal employment, which may fit better with other aspects of their lives.

If they are not engaged as an employee by the entity using them (the 'end client'), there are several different ways in which an individual might provide their services. Often this will be through an 'intermediary' such as an employment agency or the individual's own personal service company (PSC). Alternatively, the worker's services might be made available through an 'umbrella company'. This is not a term of art but is generally used to describe a company that employs individuals who provide their services to end clients.

Typically, an umbrella company will enter into a contract with an employment agency to provide a worker's services in return for receiving a fee. After retaining an amount to cover its own overheads (such as administration fees and employer national insurance contributions (NICs)), the umbrella company pays the individual worker a salary from which it deducts income tax and employee NICs through Pay As You Earn (PAYE) in the normal way. However, 'umbrella company' is sometimes also the name given to a company that a business uses as a payroll agent to operate PAYE for its employees. The crucial difference between the two different types of arrangement is that the second type of umbrella company is not the legal employer of the workers and so merely provides an administrative function.

The Rise of the Umbrella Company

Over time, the United Kingdom (UK) has developed rules to ensure that individuals who supply their services in a way that is equivalent to employment are taxed in the same way as they would if they were employees.

Agency Rules

For several years, employment agencies have, where certain conditions are met, had to treat the workers they supply to end clients as employees for tax purposes. These 'agency rules' impose PAYE obligations where a worker:

personally provides services to an end client,
under a contract between that client and the agency, and
in circumstances where the worker is subject to the right of supervision, direction, or control by any person.

Personal Service Companies and IR35

Some individuals choose to provide their services through a PSC that they own and of which they are a director. This may be for commercial reasons such as the limit to a company's liability. However, it also means that they can choose to be paid through dividends, which attract a more favourable tax regime than employment income and do not attract NICs.

PSCs can technically be within the agency rules but, due to the way in which the worker typically extracts value, they will usually fall outside them. However, PSCs need to be mindful of obligations they may have under the 'IR35 rules', named after the Inland Revenue press release which introduced them in 2000.

The IR35 rules apply where, were you to ignore the existence of the PSC and treat the worker as engaged directly by the end client, they would be considered to be the end client's employee for tax purposes. In such circumstances, the PSC must pay employment taxes in respect of fees received that relate to the worker's services.

A similar regime applies to arrangements structured using a third-party 'managed service company' (MSC), however, the rules are harsher. While end clients cannot be responsible for a PSC's PAYE obligations under IR35, they can become liable for those of an MSC.

The Off-Payroll Working Rules

One key reason umbrella companies have become more common in recent years is the impact of the 'off-payroll working rules'. Although these rules operate in a similar way to IR35, there is a crucial difference in the fact that the decision as to whether the worker would be an employee for tax purposes (if you ignore the existence of the PSC) rests with the end client. In addition, if there is no other UK entity in the supply chain, the end client is responsible for deducting income tax and employee NICs from the payments it makes under the arrangement and must account for these (together with employer NICs and, if relevant, the Apprenticeship Levy) to HM Revenue and Customs (HMRC).

As well as exposing end clients to income tax and NICs liabilities, the off-payroll working rules impose a significant administrative burden for companies engaging workers in this way. Deciding whether the worker would be an employee if you ignored the existence of the PSC (the status determination test) is a notoriously difficult process, as highlighted in high-profile cases concerning famous TV pundits, presenters, and, most recently, football referees¹.

One way of avoiding these issues altogether is to ensure that the worker is actually employed by an entity within the supply chain (the 'umbrella company'), which is not an intermediary within the off-payroll rules. The umbrella company then pays the individual and accounts for the income tax and NICs due in the usual way.

While there are good commercial reasons for having umbrella companies in labour supply chains, and most operate correctly and pay the employment taxes they owe, HMRC became aware of arrangements using umbrella companies to avoid tax. For example, some schemes involved umbrella companies giving workers their pay gross as 'tax-free' loans or grants, while others involved the umbrella company deducting income tax and NICs but not paying it to HMRC. A whole avoidance industry developed using so-called 'mini' umbrella companies.

New Rules for Umbrella Companies

Given the normally low level of capital in umbrella companies, recovering unpaid tax from the employer is hard, and collecting tax and NICs from individual employees can be administratively difficult. The government's solution was to introduce legislation that makes other parties (including end clients) within the labour supply chain 'jointly and severally' responsible for the umbrella company's PAYE obligations.

The new rules apply where a business engages a worker, who is employed by a third-party entity that carries on a business of supplying labour (i.e., the umbrella company), to provide services to it. In these cases, the end client business can be jointly and severally liable for the PAYE obligations of the umbrella company in respect of any payments relating to the worker's services.

        
            Points to Note About the New Rules Include:
        
They apply to payments made on or after 6 April 2026, regardless of when the underlying arrangement was made.

Where the supply chain involves several intermediaries, joint and several liability will rest with the agency that engages with the end client. However, even in these circumstances, the end client will have joint and several liability for the umbrella company's PAYE debts if that agency is either:

non-UK resident, or
'connected' with the umbrella.

These are facts that might be difficult for the end client to establish.
Even though, as the worker's employer, the umbrella company is required to operate PAYE correctly, joint and several liability is both automatic and strict.

Having reasonable procedures in place or only engaging with 'compliant' umbrella companies will not protect an end user against HMRC seeking to recover any unpaid PAYE debts.

Failure to carry out thorough supply chain due diligence can create significant legal, financial and reputational risks for a company's business.
 
It is worth noting that HMRC already has powers under criminal law to prosecute or impose fines on businesses that do not have reasonable procedures in place to prevent tax evasion in their labour supply chains.

End clients that are 'small' (and therefore outside the scope of the off-payroll working rules) are now exposed to tax and NICs liabilities of other members of the supply chain and will have to put in place processes for checking their labour supply chains.

For this purpose, a company is 'small' if it satisfies two or more of the following tests for two consecutive financial years:

it has an annual turnover not exceeding £15m,
it has a balance sheet total of not more than £7.5m, and
it has an average of no more than 50 employees for the year.

Large and medium-sized end clients engaging workers through intermediaries should already have procedures in place to identify engagements caught by the off-payroll working rules meaning additional compliance checks under the umbrella company regime should be less onerous for them.

Some companies choose to operate in the UK through an 'employer of record', particularly if they don't want to go to the time and expense of establishing a local subsidiary or branch in the UK.

These types of operations could also qualify as umbrella companies, thereby exposing end clients that engage workers in this way to PAYE liabilities under the new rules.

The rules also extend to 'purported umbrella companies'.

This is designed to capture situations when steps have been taken to:

create the impression that a worker is employed by the umbrella (when they are not), or
suggest that a worker operating through a PSC is being paid a salary (when in fact they are receiving dividends).

In some circumstances, the new rules take priority over the existing rules for agencies, PSCs and MSCs. So, for example, a supply chain might comprise an end client, an agency and an umbrella company. If the umbrella company gives the impression that it employs the worker (but it does not), the umbrella company rules will take precedence over the agency rules that would otherwise apply (with the accompanying exposure to joint and several liability).

Practical Steps

The complexities introduced by the new rules for umbrella companies (and those purporting to be umbrellas) have driven some businesses to take the easier option of simply employing workers directly. However, for others, the flexibility offered by off-payroll working continues to be attractive and meets a genuine business need.

The new legislation is so wide that any business engaging off-payroll workers must now meticulously identify the structure of its labour supply chains, keep them under regular review, and ensure that it can recoup the costs of any PAYE liability it has to meet because of its joint and several liability.

This is a clear area of exposure in deal scenarios and will require comprehensive due diligence and appropriate contractual protection and insurance cover. End clients engaging workers through any form of agency or intermediary should have robust processes in place to identify and monitor risks:

    Ensure you fully understand your labour supply chains and map them back to the worker:


Does the worker provide their services through an intermediary?
What form does the intermediary take (for example, is it a PSC, an agency, umbrella company or MSC)?
Who employs the worker within that supply chain (if anyone)?
Are any of the parties within the supply chain offshore?
How are the workers paid and tax accounted for?


Identify which of the relevant tax regimes could apply (agency rules, IR35, off-payroll working, MSCs, umbrella companies) remembering that more than one of these might be relevant.

If there is any potential liability under the relevant rules, ensure that PAYE is being operated correctly within the supply chain. Some end clients might choose to go a step further and account for the PAYE direct.

Ensure that contractual arrangements contain suitable warranties and indemnities to cover any potential liability.  Consider whether it is possible to obtain insurance to cover these risks. Even if a company does not have liability for PAYE under the umbrella company rules because joint and several liability rests only with an agency, it needs to ensure that the agency itself has taken reasonable steps to ensure that the umbrella is complying with its obligations.

It is good practice for compliance obligations in this area to be given to a person or team that is adequately trained, resourced and supported. Good communication with each worker's line manager is a key part of this process because checking worker supply chains should not be a one-off exercise but something that is conducted regularly.

HMRC has published extensive guidance² to help businesses check their worker supply chains and this emphasises the importance of only sourcing workers through reputable supply chains.

1 Professional Game Match Officials Ltd v The Commissioners for HMRC [2026] UKFTT 654 (TC)

2 HMRC (2026), Help with labour supply chain assurance — GfC12, HM Revenue & Customs, Help with labour supply chain assurance — GfC12 - Recommended approach to assurance - Guidance - GOV.UK