The landscape of temporary labour is undergoing a significant transformation. In an effort to close tax gaps and protect workers, the government has announced critical changes to the management of pay as you earn (PAYE) within the umbrella company market. For private sector businesses that rely on contingent labour, this development is more than just a regulatory update - it's a fundamental shift in how risk, compliance, and employee relations must be managed.
From April 2026, responsibility for PAYE and national insurance contributions (NICs) will shift. If a non-compliant umbrella company is used, the liability will fall on the recruitment company - or, if you don’t work with a recruiter, on the end-client organisation.
Working with a managed service provider (MSP) significantly reduces your risk profile, as the provider takes on responsibility for the full supply chain - otherwise, this responsibility stays with your organisation.
While the central aim is to combat tax avoidance, the effects on employee relations and workforce strategy will be far-reaching. Business leaders must consider whether their supply chain is resilient enough to meet these new standards?
The strategic intent behind the changes
Understanding the rationale behind these measures is key. The government’s objectives are anchored in values that most modern organisations share: fairness, transparency, and worker protection.
The new regulations pursue three main goals:
Closing the tax gap: Stopping the substantial losses to the exchequer caused by fraudulent activities and organised crime.
Protecting workers: Preventing temporary staff from facing unexpected, significant tax bills as a result of the actions of non-compliant providers.
Levelling the playing field: Ensuring ethical businesses are not undercut by fraudulent operators, so that compliant practices are rewarded - not penalised.
For HR directors and talent acquisition leaders, this underscores the importance of ethical supplier management. Passive trust is no longer enough; visibility and proactive control are now essential.
The impact on employee relations
The relationship between businesses and contingent workers plays a pivotal role in operational success. Contractors and temporary employees are often crucial to delivering projects and maintaining agility, yet engagement practices can feel remote or transactional. The incoming regulatory changes will bring new focus to these relationships.
Building trust through security
According to the government, worker welfare is at the heart of the reforms. Around 700,000 individuals in the UK engage in work via umbrella companies each year. Many have experienced schemes promising higher pay, only to face large liabilities later. By ensuring tax is properly deducted at the source, companies can offer their temporary workforce authentic financial security. This helps build trust and positions your business as an employer of choice for sought-after talent who prioritise stability over inflated, unsustainable pay rates.
The risk of disruption
Transitions of this scale rarely occur without challenges. As agencies and end clients review supply chains, some umbrella companies may leave the market. This could disrupt workers, requiring transitions to select compliant providers or direct payroll arrangements.
Effective communication is crucial. If a worker’s umbrella company is removed, how that change is explained influences trust. Done well, it is a measure of protection; if mishandled, it risks coming across as an unnecessary complication.
Increased due diligence
Due diligence must now become an active, ongoing process rather than a one-time contract requirement. Businesses must have a clear view of who pays their temporary staff and where liabilities may arise. If you contract directly with umbrella companies, the risk is yours.
Administrative burden vs. strategic opportunity
There is an undeniable administrative cost. Auditing supply chains, verifying PAYE submissions, and monitoring supplier integrity require time and resources - which may be limited.
However, this challenge is also an opportunity. It encourages consolidation – allowing your company to move away from a fragmented array of recruitment agencies and umbrella companies to a shorter, better-managed preferred supplier list (PSL). This both mitigates risk and can deliver savings through improved commercial terms and simplified management.
Actionable advice: How to prepare
Although April 2026 may feel distant, the scale and strategic implications of this change mean businesses need to prepare now. Here’s how to ensure your organisation is ready to benefit from the new regulations
1. Conduct a forensic supply chain audit
What you can’t see, you can’t manage. Start with a comprehensive map of your labour supply chain.
Identify every umbrella company supplying your workforce.
Determine contractual relationships (direct vs. agency).
Conduct your due diligence
Flag any providers unable to demonstrate PAYE compliance.
2. Invest in employee training
Your HR, procurement, and resourcing teams are fundamental in safeguarding compliance. They need to recognise early warning signs of tax avoidance schemes -such as loan arrangements or mini-umbrella companies. Training now protects your business against future liabilities.
3. Strengthen commercial contracts
Review contracts with recruitment agencies to include robust indemnity clauses covering tax liabilities. Most importantly, require transparency. Any good agency should provide regular, evidenced PAYE remittances for any workers supplied to your business.
4. Shine a light on statement of work (SoW) engagements
Consider SoW engagements in your organisation and whether these are also appropriately accounted for in your risk management strategy. Do you have consultancy and professional services spend that is disguised as contractor spend? Lack of rigour in the classification of spend could put your organisation at significant risk with regard to the umbrella legislation and IR35 compliance. Where genuine SoW provisions are in place, instigating a robust services procurement solution can help manage risk and potentially bring other benefits such as better scoped projects, competitive processes to appoint suppliers, and through effective triage, savings on this spend category.
A future built on transparency
These changes effectively bring an end to what has been referred to as the "wild west" of umbrella companies. By shifting the liability, the government is raising standards for the whole market.
For business leaders, this presents an opportunity to realign supplier management with values of compliance, fairness, and reputation protection. A compliant supply chain not only shields workers, but also safeguards your organisational brand and operational stability.
By acting now - rather than waiting for the 2026 deadline - you can position your organisation as a leader in ethical and compliant hiring. This sends a strong message to stakeholders, employees, and the wider market: you prioritise strategy and integrity. The efforts made today will foster a stronger, more sustainable workforce tomorrow.
Looking for a compliant and reliable source of contingent workers? We’ve taken the steps to ensure full compliance with the latest PAYE regulations, so you can focus on growing your business without the worry of tax liabilities. Let’s build a workforce you can trust. Speak to one of our experts today to learn more about our services and how we can support your needs.
