ESM2405 - Umbrella companies legislation: Chapter 11 ITEPA 2003- introduction
Source: gov.uk (2025-09-18)


This guidance is effective from 6 April 2026 and relates to draft legislation expected to be included in the next Finance Bill. The legislation and guidance is subject to revision before or during the process of Parliament considering the Bill.

Sections 61Y-61Z1 Chapter 11, Part 2 of the Income Tax (Earnings and Pensions) Act 2003 ("ITEPA 2003")

This guidance explains legislation introduced to prevent tax non-compliance that includes avoidance and fraud in the umbrella company market, with effect from 6 April 2026.
- Sections 61Y-61Z1 Chapter 11, Part 2 of the Income Tax (Earnings and Pensions) Act 2003 ("ITEPA 2003").
The new legislation outlines:
- The circumstances in which the agency and or client ("the relevant party") can become jointly and severally liable when in a contractual chain with an umbrella company
- What amounts the agency or client will be jointly and severally liable for
- How to determine who in the contractual chain will be jointly and severally liable alongside the umbrella company
- How the measure applies when arrangements are entered into with a party that purports to be an umbrella company.
Umbrella companies are employment intermediaries that employ, or purport to employ, workers on behalf of agencies and end clients. They typically engage or purport to engage, workers on contracts of service, and thereby take on the legal obligations of an employer for tax and employment rights purposes, effectively allowing end clients and agencies to outsource those obligations. Whilst many umbrella companies operate compliantly too many are used to facilitate non-compliance including tax avoidance and tax fraud. This measure aims to improve compliance in the market by making those who can control labour supply chains legally responsible for ensuring that PAYE is properly accounted for.

For further information about umbrella company arrangements see ESM2415- defining umbrella companies (https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm2415).

The contractual chain

The worker is typically an employee of the umbrella company and there should be a contract of service in place that defines the working terms and conditions. A contractual agreement should be in place between the umbrella company and a recruitment agency for the provision of the worker's services, and there should be a contractual agreement in place between the recruitment agency and the end client relating to the supply of the worker to the end client. It may also be the case that the umbrella company contracts directly with the client without a recruitment agency in the contractual chain, or that there are multiple agencies in the chain.

Interaction with other intermediaries legislation

The umbrella companies legislation will not usually apply where the worker is not employed by a third party, but is instead a deemed employee under the following legislation
- ESM2001- Chapter 7 ITEPA 2003 (agency legislation) (https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm2001)
- ESM8001- Chapter 8 ITEPA 2003 (intermediaries legislation small clients) (https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm8001)
- ESM3510- Chapter 9 ITEPA 2003 (managed service companies legislation) (https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm3510)
- ESM9001- Chapter 10 ITEPA 2003 (intermediaries legislation public authorities) (https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm9001)
- ESM10001a- Chapter 10 ITEPA 2003 (intermediaries legislation medium or large-sized organisation) (https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm10001a)
- Section 863a ITTOIA 2005 (salaried members legislation). (https://www.gov.uk/hmrc-internal-manuals/partnership-manual/pm251000)
For circumstances where Chapter 11 will take precedence see ESM2440- purported umbrellas (https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm2440).

For general guidance about working through an umbrella company see ESM2390- umbrella companies. (https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm2390)