Introduction
In a significant move on 30th October, HMRC announced that from April 2026 the responsibility to account for PAYE (Pay As You Earn) and National Insurance Contributions (NICs) will include agencies and businesses. This change comes as part of the ongoing efforts to tighten compliance in the UK labour market, ensuring that tax and NIC obligations are properly managed.
HMRC estimates 275k or 40% of contingent workers that were engaged through Umbrella Companies in 2023/2023 failed to comply with their tax obligations.
While this shift may seem straightforward on paper, it presents a range of risks and challenges for agencies, businesses, and the contracting workforce.
One of the primary concerns in the lead-up to the April 2026 transition is the current issue with umbrella companies, many of which have been found to be non-compliant. This post explores the implications of HMRC’s decision, the risks associated with the transition, and the ways in which businesses and agencies can prepare themselves for a new era of compliance.
A Closer Look at the Changes
Before delving into the risks, it’s essential to understand what this shift entails. Under the new rules, agencies or end-client businesses will bear the responsibility for ensuring that PAYE and NICs are correctly calculated and paid. Previously, this responsibility was often left to the individual worker or, more commonly, to umbrella companies acting as intermediaries.
With the new changes, agencies and end-client businesses will need to implement robust systems to manage PAYE and NIC requirements for all contingent workers. The intention is to reduce tax evasion and errors, but it also brings a new set of complexities that businesses must navigate carefully.
The Current Issue with Umbrella Companies
One of the driving forces behind this policy change is the persistent issue of non-compliant umbrella companies. These companies act as intermediaries between contingent workers and end clients, handling tax deductions, national insurance, and other payroll responsibilities. However, in recent years, HMRC has flagged numerous instances of malpractice among some umbrella companies, which have been exploiting loopholes to reduce tax payments illegally or manage funds inappropriately. This includes practices such as:
Mini-Umbrella Company (MUC) Fraud: The creation of multiple small companies to exploit tax reliefs meant for genuinely small businesses, allowing umbrella firms to pay lower NICs.
Non-compliant Payroll Practices: Misleading contingent workers about tax deductions or retaining significant portions of pay without proper justification.
False Self-Employment: Misclassifying contingent workers as self-employed, even when they are effectively employees, to avoid PAYE and NICs.
These practices not only deprive the government of tax revenue but also place contractors in a precarious position, leading to potential underpayment of tax and loss of worker rights. The new HMRC rules aim to close these gaps, but they also transfer significant risk to businesses and agencies.
Risks for Agencies and Businesses
With the upcoming changes, there are several risks that agencies and businesses will need to manage carefully to avoid falling foul of HMRC regulations:
1. Increased Administrative Burden
The shift of PAYE and NIC responsibilities to agencies and businesses means an increased administrative workload. Firms will need to invest in payroll systems, staff training, and processes to handle the additional complexity. Mistakes in PAYE or NIC calculations can result in significant penalties, making it crucial for businesses to ensure their compliance processes are robust and accurate.
2. Compliance Risk
With HMRC cracking down on non-compliance, agencies and businesses face the risk of audits and investigations if they fail to properly manage PAYE and NIC obligations. Non-compliance, even if unintentional, can lead to heavy fines, legal consequences, and reputational damage. Agencies will need to ensure that all workers are correctly classified, that PAYE is applied appropriately, and that they are up to date with all the nuances of tax legislation.
3. Liability for Past Errors
The shift in responsibility means that any past errors related to misclassified employment status or PAYE miscalculations could potentially become the liability of agencies and businesses. HMRC may choose to investigate prior arrangements, and any underpayment of tax due to non-compliance could be clawed back. This poses a particular risk for businesses that have relied heavily on umbrella companies with questionable compliance practices.
4. Loss of Worker Confidence and reduced performance
The contingent workforce has long been wary of PAYE deductions, as many contractors prefer the flexibility and tax advantages of self-employment. With the new regulations, workers may face increased PAYE deductions that reduce their take-home pay. This could lead to dissatisfaction, demotivation and a potential loss of talent, especially if agencies are unable to offer attractive rates or benefits to compensate for the perceived loss in income.
5. Complexity in Contingent Worker Classification
Determining the correct employment status of each worker will be a major challenge for businesses. With IR35 rules already complicating the classification of workers as employees or contractors, the additional layer of PAYE responsibility increases the risk of getting it wrong. Misclassifying workers can lead to serious compliance breaches, making it essential for agencies to conduct thorough and ongoing assessments of employment status.
You can read here about the risks for business leaders in using non compliant umbrella companies, as well as some of the high profile cases that have significantly damaged the reputation of businesses like G4S and the NHS.
Preparing for the Shift
Given the complexities and risks, and the continuing shortfall of skilled contingent workers, it’s crucial for agencies and businesses to start preparing now for the April 2026 deadline. Here are some steps that can help:
1. Review Current Engagements
Begin by auditing your existing contingent workforce arrangements, including any contracts that involve umbrella companies. Ensure that the employment status of each worker is accurate and compliant with HMRC’s guidelines. This includes checking whether PAYE has been correctly applied in the past and if any adjustments are needed before the transition.
2. Enhance Compliance Training
Train your HR and procurement teams on the upcoming changes to ensure they understand the new requirements. Compliance is a moving target, and it’s essential that your staff are well-versed in the intricacies of PAYE, NIC, and worker classification.
3. Engage Legal and Tax Advisors
Consult with legal and tax advisors who specialise in employment law and compliance. They can help you navigate the complexities of the new rules, identify potential risks, and ensure that your systems are set up to handle the shift smoothly. Advisors can also provide guidance on managing past liabilities, should any arise during the transition.
4. Communicate with Contingent Workers
Clear communication is essential. Many will be concerned about how the changes will impact their pay, so be transparent about the shift in responsibility and what it means for them. Consider renegotiating contracts to ensure that they reflect the new compliance landscape, and offer competitive rates to retain top talent. PEPSOs like Rockford believe that happy employees are committed employees and perform better. That’s why we ensure full transparency of remuneration and the provision of other benefits. You can read more about Rockford’s commitment to its employees here.
The Impact on the Role of Umbrella Companies
The HMRC announcement doesn’t eliminate the role of umbrella companies, but it does change the dynamics of the relationship between agencies, businesses, and contractors. With the increased scrutiny, only compliant and reputable umbrella companies are likely to survive in the long run. Agencies and businesses will need to be more selective in their choice of umbrella partners, opting only for those with a proven track record of compliance.
Long-Term Benefits of Compliance
While the shift of PAYE and NIC responsibility to agencies and businesses presents challenges, it also offers potential benefits in the long run. A more compliant marketplace can lead to:
Greater Stability: With tighter controls and clearer guidelines, businesses can operate with greater confidence, reducing the risk of penalties and legal disputes.
Improved Reputation: Businesses that demonstrate a commitment to compliance are likely to enhance their reputation, attracting high-quality contingent workers and building trust with clients.
Level Playing Field: A crackdown on non-compliant umbrella companies can level the playing field for agencies that have always operated within the rules, allowing them to compete fairly in the marketplace.
Conclusion
The April 2026 transition of PAYE and NIC responsibility to agencies and businesses is a significant shift in the UK labour market, driven by a need to address ongoing compliance issues with umbrella companies. While this change poses risks, including increased administrative burdens, compliance challenges, and contingent worker dissatisfaction, it also offers opportunities for businesses that are proactive in preparing for the transition.
By investing in robust payroll systems, enhancing compliance training, reviewing current engagements, and conducting thorough due diligence on partners, agencies and businesses can navigate the transition smoothly. The key is to act now—early preparation will be crucial in mitigating risks and positioning your business for success in a post-2026 compliance landscape.
If you are concerned about your labour supply chain and whether it is compliant, or you just want a perspective of the specific requirements to comply with the new arrangements, please contact us at [email protected]
