Over the coming year, the contracting industry is bracing itself once again for some significant changes, including updates to umbrella liability, a rise in dividend tax, and more Companies House regulations for limited company workers.
The contracting market remains highly competitive, and many clients are still reluctant to engage limited company contractors, so work outside IR35 remains highly prized.
PAYE liability changes reshape umbrella supply chains
From April 2026, a major change takes effect in how unpaid PAYE and National Insurance are handled, where an umbrella company exists in the supply chain.
Under the new rules, HMRC will be able to recover unpaid liabilities not only from the umbrella company itself, but also from the recruitment agency or end client if the umbrella fails to meet its tax obligations.
The policy is aimed squarely at long-standing non-compliance in parts of the umbrella market, where liabilities have often been difficult to enforce once providers disappear or collapse.
Agencies and clients now face a strict deadline to implement controls when working with umbrella companies.
That means deeper due diligence, routine payslip checks, and clear evidence that deductions are being calculated and paid correctly and on time – ideally via payroll verification software.
For contractors, this is likely to translate into more restrictive preferred supplier lists (PSLs). On the significant upside, however, the new rules are likely to make it harder than ever for unscrupulous operators to enter the umbrella market.
Formal umbrella industry regulation moves closer
The April 2026 umbrella liability change is the first step in the government’s broader commitment to regulate the umbrella industry as a whole.
The timetable was set out in the Employment Rights Bill implementation roadmap published in July 2025, which maps out employment reforms through to the end of 2027.
While the final framework has yet to be published, it is clear that it will soon be difficult for bad actors to operate in the umbrella sector, as they have for over fifteen years, almost unchecked.
Another tax rise for limited company contractors
The tax environment for limited company contractors has never been tougher.
Take home pay has been steadily eroded by a decade of dividend tax hikes, the major 2023 Corporation Tax hike, as well as restrictions on the flat rate VAT scheme, and frozen income tax thresholds in more recent years.
In some cases, there is little difference in the post-tax income between directors and employees (even if IR35 isn’t a factor).
The latest tax increase is a 2p rise in the basic and higher rate dividend tax from April 2026, adding further pressure on contractors already dealing with the Off Payroll rules and a tough contract market.
Commenting on this latest tax rise, Christian Hickmott, CEO at Integro Accounting, said:
“The forthcoming rise in dividend taxation will add to the growing complexity faced by owner-managed limited companies.
“For many directors, dividends remain an important source of income, so even modest rate increases can have a meaningful impact on their take-home pay.”
Companies House ID checks add another compliance layer
Alongside tax and umbrella reform, limited company contractors must now deal with mandatory identity verification under the Economic Crime and Corporate Transparency Act.
All directors and persons with significant control (PSCs) must now complete an identity check before they can continue to file company information.
Verification can be completed directly online or through an authorised agent, such as an accountant.
James Leckie, MD of leading contractor news site IT Contracting said:
“Although this is not a tax measure, it adds another administrative job to the growing compliance load facing small company directors.
“Missed verifications can lead to rejected filings and potential penalties, underscoring the importance of keeping company records fully up to date.”
Interestingly, company incorporation fees and Confirmation Statement filing fees also increased from February 2026.
Another year of changes ahead
Contractors are very resilient, which is a good thing, considering how many pieces of legislation have added complexity to the industry since IR35 was first introduced in 2000.
As ever, to keep on top, it is always best to know what tax and regulatory changes are on the horizon.
