New Umbrella Company PAYE Rules & Changes to Off-Payroll Working Small Company Exemption

Posted: June 8, 2026

Significant changes to the taxation of contingent labour and contractor arrangements took effect from April 2026. The new measures are aimed at increasing compliance within the umbrella company market and simplifying responsibility for PAYE and NIC obligations in labour supply chains.

At the same time, changes to the “small company” exemption within the off-payroll working (“IR35”) rules will mean that some businesses currently responsible for status determinations may no longer fall within the regime. In those cases, responsibility for assessing employment status may revert to the contractor’s own intermediary company.

These developments are likely to affect recruitment agencies, end users of contractor labour, umbrella companies and personal service companies alike. For employers, they also make robust payroll compliance — whether in-house or through outsourced payroll services — more important than ever.

New Umbrella Company PAYE Rules from April 2026

The Government has introduced new rules designed to address perceived non-compliance in the umbrella company sector, particularly where PAYE and NIC liabilities are lost within complex labour supply chains.

Broadly, from April 2026, where an individual provides services through an umbrella company arrangement, responsibility for accounting for PAYE and NIC may shift higher up the labour supply chain if the umbrella company fails to meet its obligations.

The reforms are intended to ensure that HMRC can recover PAYE and NIC from parties with greater visibility and financial substance within the chain.

What is an Umbrella Company?

An umbrella company typically employs workers who provide services to end clients through recruitment agencies or other intermediaries.

The umbrella company:

employs the worker;
invoices the agency or end client;
operates PAYE and NIC; and
pays the worker as an employee.

While many umbrella companies operate compliantly, HMRC has expressed concern regarding:

tax avoidance arrangements;
mini-umbrella company fraud;
non-payment of PAYE and NIC; and
opaque labour supply structures.

Shift in PAYE Liability

Under the new framework, where PAYE is not properly accounted for by an umbrella company, HMRC may seek recovery from other parties in the supply chain.

Depending on the structure, liability may potentially move to:

the recruitment agency; or
ultimately the end client.

This represents a substantial compliance risk for businesses engaging contingent labour.

Practical Consequences for Businesses

Businesses using contractor or temporary labour should now review:

labour supply chains;
due diligence procedures;
contractual protections; and
onboarding processes for agencies and umbrella providers.

In particular, businesses should consider:

obtaining evidence of PAYE compliance;
reviewing indemnity provisions;
carrying out periodic compliance audits; and
identifying where ultimate tax risk may sit within the chain.

The changes are likely to increase scrutiny of:

outsourced payroll arrangements;
labour-only supply models; and
arrangements involving multiple intermediaries.

Changes to the Off-Payroll Working Small Company Exemption

Alongside the umbrella company reforms, the Government has increased the thresholds for the “small company” exemption within the off-payroll working rules.

From April 2026, a company will generally qualify as “small” for these purposes if it satisfies two out of the following three criteria:

annual turnover not exceeding £15 million;
balance sheet total not exceeding £7.5 million; and
no more than 50 employees.

Previously, lower financial thresholds applied.

Why This Matters

Where a client qualifies as “small” under the off-payroll working rules:

the responsibility for assessing employment status does not sit with the end client; and
responsibility instead reverts to the contractor’s intermediary, typically the contractor’s personal service company.

As a result, some medium-sized businesses currently operating the off-payroll working regime may now fall outside it following the increase in the thresholds.

For those businesses:

status determination statement (“SDS”) obligations may cease;
PAYE withholding obligations under the off-payroll rules may no longer apply; and
responsibility for determining whether IR35 applies may revert to the contractor company itself.

Businesses Potentially Affected

The threshold increase may particularly affect:

owner-managed groups;
technology businesses;
professional services firms;
property businesses; and
fast-growing entrepreneurial companies.

Businesses that previously exceeded the old thresholds only marginally may now find themselves outside the off-payroll regime altogether.

Transitional Considerations

Businesses should carefully review:

whether they now qualify as “small”;
existing contractor arrangements;
contractual terms relating to status determinations;
ongoing SDS processes; and
whether payroll procedures should change from April 2026.

Care should also be taken where group structures are involved, as group aggregation rules may affect whether the exemption applies.

Interaction Between the Two Reforms

Interestingly, the two reforms may operate in opposite directions for some organisations.

On the one hand:

the umbrella company rules increase compliance and PAYE risk within labour supply chains.

On the other:

the expanded small company exemption may reduce obligations for certain end users engaging contractors through personal service companies.

Businesses using both umbrella workers and PSC contractors may therefore experience:

increased exposure in some arrangements; but
reduced obligations in others.

Next Steps

Businesses engaging contractors or temporary workers should now:

review whether they satisfy the revised small company thresholds;
map labour supply chains involving umbrella companies;
assess contractual protections and indemnities;
review existing IR35 compliance procedures; and
consider whether responsibility for status determinations may change from April 2026.

The practical impact of these reforms will depend heavily on the structure of individual labour arrangements and existing compliance processes.

RJP LLP would be pleased to assist businesses in reviewing their contractor arrangements, labour supply chains and off-payroll working compliance in light of the new rules. Contact us at partners@rjp.co.uk.