Please refer to the editor’s commentary for the context to this article
Dave Chaplin, Founder & CEO, IR35 Shield highlights the elements he sees as important for recruiters to consider.
In July 2025, the Government published draft legislation introducing a new Chapter 11 in Part 2 of the Income Tax (Earnings and Pensions) Act 2003, due to take effect from 06 April 2026. The measure, which will be mirrored for National Insurance Contributions, is designed to address widespread non-compliance in the umbrella company market, which has grown significantly since the rollout of the Off-Payroll reforms in 2021.
The new rules contain a Joint and Several Liability (JSL) provision, which marks the most significant shake-up of the umbrella industry in years. Far from being a technical footnote, the legislation has the potential to reshape how clients, agencies, and umbrellas themselves work together. Here are ten points that capture the essence of what’s changed – and what it could mean for the future.
- Clients are now in the line of fire
For the first time, end clients could be directly liable if umbrellas fail to pay PAYE and National Insurance. The new rules turn umbrella engagement from a hands-off outsourcing exercise into a potential compliance trap. For many businesses, the perception of risk alone could be enough to trigger a rethink of hiring strategies.
- Agencies share the liability burden
Agencies are no longer insulated by pushing payroll responsibility onto umbrellas. Under JSL, they stand shoulder-to-shoulder with their clients in facing HMRC if things go wrong. This joint exposure forces agencies to reconsider their operating models – whether through absorbing payroll internally, or reengineering flows so PAYE reaches HMRC without detours.
- The umbrella business model faces an existential challenge
Ironically, umbrellas campaigned for reform to clean up the market. But the legislation risks wiping out even compliant providers unless they can present a structure that eliminates upstream liability. Reinvention is no longer optional; it’s a condition of survival.
- Due diligence audits are not enough
In the past, audits and pay slip checks gave clients and agencies comfort. Under JSL, that comfort evaporates. There’s no statutory defence in “we checked.” Liability still lands if PAYE is not paid. This threat alone may accelerate blanket bans on umbrella use.
- PAYE must move closer to the source
A recurring theme is control. Clients and agencies may decide the only way to ensure compliance is by paying PAYE directly to HMRC, passing only net wages down the chain. For umbrellas, this strips away a core function – but it may also create space to evolve into benefits and HR support providers rather than pure payroll intermediaries.
- IR35 looks more manageable than before
Offset rules and a more proportionate approach mean IR35 no longer carries the same existential dread for clients. While it still matters, outside-IR35 contracting now looks more viable than umbrella engagement, given the new risks. This balance may encourage businesses to explore direct contracting routes again.
- Agencies may gain a competitive edge through compliance
For agencies, the disruption also creates opportunity. Those who design payroll flows that guarantee zero risk – for example, by ensuring taxes are settled before funds move – can differentiate themselves in a nervous market. Compliance becomes a selling point rather than a cost.
- Umbrellas must prove they’re “risk-free”
Survival for umbrellas may depend on removing every trace of liability for clients and agencies. Escrow models, independent guarantees, or direct-to-HMRC payment mechanisms could form the basis of a new generation of umbrella services. But those unable to adapt fast will likely be abandoned.
- The market could shrink dramatically
The combined pressure of liability, risk aversion, and client preference may mean only a handful of umbrellas survive. This contraction could be brutal: while rogue operators are driven out, even compliant firms may struggle if they can’t meet new expectations quickly enough.
- A new era of accountability has arrived
Above all, the JSL provisions signal a decisive shift: responsibility for employment tax can no longer be outsourced away. Whether you are a client, agency, or umbrella, the message is clear – the liability stays with you, even when the money flows elsewhere.
