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Choosing the right payroll arrangement has become increasingly important for contractors, temporary workers, recruitment agencies and businesses in the UK. In 2026, this decision deserves even more attention because HMRC has introduced new rules affecting labour supply chains that involve umbrella companies.
From 6 April 2026, new PAYE rules apply when an umbrella company is part of a labour supply chain. Under these rules, the recruitment agency supplying the worker—or the end client where there is no agency—can become responsible for making sure PAYE is operated correctly. HMRC can recover underpaid PAYE from the relevant agency or end client.
This change makes it important for businesses and workers to understand the difference between being paid directly through PAYE and working through an umbrella company.
What Is PAYE?
PAYE, or Pay As You Earn, is the standard system used by employers to deduct Income Tax and employee National Insurance contributions from employees’ wages before paying them.
With a traditional PAYE arrangement, the employer manages payroll, calculates deductions and reports the necessary information to HMRC. The employee receives their net salary after applicable deductions.
For permanent employees, PAYE is usually straightforward because the worker has a direct employment relationship with the company. The employer is responsible for operating payroll correctly and meeting its employment and tax obligations.
PAYE can also be used for temporary workers who are employed directly by an agency or another organisation. For many workers, this provides a relatively simple payroll arrangement because there is no separate umbrella company involved.
What Is an Umbrella Company?
An umbrella company is an employer that commonly employs temporary workers who have found assignments through recruitment agencies. The recruitment agency finds the assignment, while the umbrella company employs and pays the worker.
The umbrella company normally processes the worker’s pay through PAYE. Workers can therefore still have Income Tax and employee National Insurance deducted from their wages even though they are not directly employed by the business where they perform their work.
HMRC explains that an umbrella company may deduct items such as its operating costs, employer National Insurance contributions, employer pension contributions and Apprenticeship Levy, where applicable, from the assignment rate before calculating gross pay. Employee deductions such as Income Tax and employee National Insurance are then made from gross pay.
This distinction is important because the advertised assignment rate is not necessarily the worker’s final gross salary or take-home pay.
What Changed From 6 April 2026?
The biggest change is not that umbrella companies have stopped operating PAYE. Instead, HMRC has changed where responsibility can sit when an umbrella company fails to account for PAYE correctly.
From 6 April 2026, when an umbrella company is involved in the labour supply chain, the recruitment agency with the relevant contract with the end client is generally responsible for ensuring PAYE is operated correctly. If there is no agency, responsibility can fall on the end client.
HMRC can recover an underpayment of PAYE from the relevant agency or end client if the umbrella company has not paid the correct amount.
The legislation therefore introduces greater financial and compliance risk for organisations using umbrella companies. The relevant parties can have joint and several liability for PAYE amounts connected with qualifying umbrella company payments.
Umbrella vs PAYE: Which Is Better?
There is no single answer for every worker or business. The better option depends on the employment arrangement, administrative requirements, flexibility and the risks involved.
Direct PAYE
Direct PAYE may be preferable when a worker is employed directly by the business or agency.
Some advantages include:
A straightforward employment relationship
Payroll handled directly by the employer
Clear payslip and tax deductions
No separate umbrella-company margin
Easier visibility over the employer’s payroll process
For businesses with regular employees, direct PAYE can provide greater control over payroll administration.
However, businesses taking on temporary workers may need additional payroll resources and must ensure that all employment and tax obligations are correctly managed.
Umbrella Employment
An umbrella arrangement can be useful for temporary workers who move between assignments and recruitment agencies.
The umbrella company can handle employment administration and payroll while the worker moves between assignments. This can make the arrangement convenient for contractors who frequently change roles.
However, workers should carefully examine their assignment rate, reconciliation statement and payslip. HMRC provides an online tool that workers can use to estimate gross and net pay from an umbrella company.
Workers should also understand what deductions are being made and whether the figures match the terms they were given by the recruitment agency.
What Does the New Liability Rule Mean for Recruitment Agencies?
The 2026 rules make due diligence particularly important for recruitment agencies.
An agency cannot simply assume that an umbrella company is operating correctly. HMRC guidance recommends checking information such as the umbrella company’s VAT registration, Companies House details, payslips and reconciliation statements. Agencies should also look for unexplained deductions and other warning signs.
This means recruitment agencies should carefully assess the umbrella companies they work with and maintain appropriate records.
A compliant and transparent umbrella partner can help reduce unnecessary risks, but agencies should still understand their responsibilities under the new rules.
What Should Workers Check Before Choosing an Umbrella Company?
Workers should not choose an umbrella company based solely on a promised take-home amount.
Before accepting an arrangement, check:
The assignment rate.
The umbrella company’s margin or operating cost.
Employer National Insurance deductions shown in the reconciliation statement.
Employee National Insurance deductions.
Income Tax deductions.
Pension contributions.
Holiday pay arrangements.
Any student loan deductions.
Whether the payslip accurately reflects the agreed employment arrangement.
HMRC specifically advises workers to check their payslips and use its umbrella pay calculator where appropriate.
A transparent breakdown makes it easier to understand how the assignment rate becomes the amount ultimately paid to the worker.
What Should Businesses Do in 2026?
Businesses using temporary workers should review their labour supply chains rather than treating umbrella arrangements as purely an administrative matter.
The first step is to identify whether workers are supplied through recruitment agencies, umbrella companies or other intermediaries.
Businesses should then establish who is responsible for PAYE and whether the relevant parties are complying with the new rules. If an umbrella company is involved, appropriate due diligence should form part of the process.
It is also important to keep accurate records and regularly review supplier relationships. A business may benefit from professional payroll and accounting advice where the structure of its workforce is complex.
So, Should You Choose Umbrella or PAYE?
For a worker who has a permanent position with a company, direct PAYE is generally the simpler arrangement.
For temporary workers who move between recruitment assignments, an umbrella company can provide a practical employment and payroll structure. However, the worker should understand the deductions and confirm that the umbrella company is operating transparently.
For recruitment agencies and end clients, the 2026 rules make compliance even more important. Using an umbrella company does not remove the need to consider PAYE responsibilities. HMRC can recover certain PAYE underpayments from the relevant agency or end client under the new rules.
The best option therefore depends on the circumstances rather than simply choosing the arrangement that appears to offer the highest headline rate.
How E2E Accounting Can Help
Understanding payroll obligations can be challenging when businesses use contractors, temporary workers, recruitment agencies or umbrella companies. The 2026 HMRC changes make accurate payroll processes and appropriate compliance checks even more important.
E2E Accounting can help businesses understand their accounting and payroll responsibilities, maintain accurate financial records and make informed decisions about their workforce arrangements.
Whether your business is reviewing its payroll process, working with contractors or assessing the impact of the new umbrella-company rules, obtaining professional accounting guidance can help you manage compliance and avoid unnecessary financial risks.
The key lesson for 2026 is simple: don’t choose a payroll arrangement based only on convenience or headline pay rates. Understand who employs the worker, who operates PAYE, what deductions apply and where the liability sits under the new HMRC rules.
