Transfer of IR35 liability from umbrella companies to engaging companies

First introduced in 2000, the off-payroll working rules (IR35) isn’t new legislation, but they still lead to confusion over who’s responsible for paying tax in contractor-end-client relationships.

The use of umbrella companies as part of that relationship can complicate things further, and new legislation announced by the Chancellor Rachel Reeves is set to change who’s responsible for ensuring the correct tax is paid.

So, if you’re a contractor or an end-client business that engages an umbrella company, read on to find out what this new legislation might mean for you.

What is an umbrella company?

An umbrella company is a business entity that acts as an employer for contractors working on temporary assignments, typically through recruitment agencies. 

Contractors become employees of the umbrella company, which handles administrative tasks such as payroll, tax deductions and National Insurance contributions. This arrangement simplifies compliance with tax regulations, including IR35 legislation, and offers contractors the benefits of employment, such as statutory sick pay and holiday pay. Umbrella companies charge a fee for their services, usually deducted from the contractor’s earnings.

What’s the current 

What does the new legislation say?

From 6th April 2026, the responsibility for accounting for PAYE income tax will transfer from umbrella companies to the end-client.

This legislation follows a consultation paper published by the previous government, which proposed potential solutions to this issue. However, they were primarily focused on encouraging businesses which use umbrella companies to show more due diligence when it comes to their supply chains. This new legislation—announced as part of the autumn budget in October—goes further, transferring responsibility for PAYE and National Insurance Contributions from the umbrella company to the end-client (or agency).

In the meantime, recruitment agencies that engage umbrella company workers will be the ones responsible for ensuring the correct PAYE and NICs are deducted from workers’ pay slips—and they’ll also be liable for any shortfall, regardless of whether they operated payroll themselves or the umbrella company operated it for them.

What’s the aim of the rule changes?

This legislation is being introduced as part of the Labour government’s crackdown on tax avoidance schemes used by umbrella companies. The measure is intended to protect workers from unexpected tax bills caused by the behaviour of non-compliant umbrella companies.

According to an analysis conducted by HMRC, at least 275,000 workers were engaged with an umbrella company that failed to comply with their tax obligations in the 2022-23 tax year. This led to an estimated £500 million in lost tax revenue as a result of ‘disguised remuneration tax avoidance schemes’.

What are the potential consequences for contractors and end-clients?

Although the legislation is designed to protect contractors, it could ultimately harm their ability to find work if end-clients and agencies decide the responsibility of ensuring PAYE/NICs compliance is too much of a burden. However, with the changes not coming into effect until April 2026, there is time for these businesses to prepare themselves. For now, it’s too soon to make too many predictions about the consequences of these changes.

Making sure you’re compliant as a contractor, or an end-client that engages contractors either directly or through an umbrella company, can be complicated. This is why it’s so important to work with an accountancy team that has extensive experience of dealing with these relationships.

Here at Warr & Co we’ve worked with both contractors and end-clients to ensure they pay the correct tax, and can operate as tax efficiently as possible.

If you’d like to find out more about our accounting services for contractors, or any of the other businesses we help, why not book a free consultation? We’ll review your current situation and provide recommendations on where we think we can help.