Umbrella Reform and Local Government Contracting: What You Need to Know Before April 2026

Introduction: Why Umbrella Reform Matters for Local Government Contractors

The local government sector has long relied on skilled interim professionals to deliver vital services, drive transformation, and fill critical leadership gaps. Behind the scenes, umbrella companies have played a pivotal role in enabling this flexible workforce but their role is evolving fast. With sweeping legislative reforms set to take effect in April 2026, the umbrella company landscape is facing its most significant shake-up in years. The incoming Labour government has made clear its intent to tackle non-compliance, close tax loopholes, and shift liability up the supply chain changes that will directly impact contractors, recruitment agencies, and local authorities alike.

In this exclusive interview, we sat down with Michael Howard, Head of Sales at Danbro, to explore what these changes mean for the sector. Michael brings over two decades of experience supporting contractors across public services, and offers a clear-eyed view of the risks, opportunities, and practical steps needed to prepare. From joint and several liability to contractor protections, compliance standards, and the future of contractor choice, this conversation is essential reading for anyone involved in local government recruitment whether you're a hiring manager, agency partner, or contractor navigating multiple assignments. As the countdown to reform begins, understanding the new rules and choosing the right umbrella partner will be critical to ensuring continuity, compliance, and confidence across the sector.

What is the current role of umbrella companies in the local government contracting landscape?

Umbrella companies engaging withing the local government sector, play a number of roles – many will think of an Umbrella company as a vehicle to allow payment from the agency to the worker, but a lot of things that go-unnoticed in what umbrella companies provide:

- Insurance for the workers assignment – PI,PL, EL

- Employment – contract ensuring stability and continued employment if moving from different assignments

- Tax efficiency – in most cases Umbrella providers can contribute towards the workers SIPP – ensuring they can work in a much more tax efficient way

- Private Medical support – some of the Umbrella companies, can ensure there workforce are provided with greater medical solutions and care packages/plans

- Flexibility on making advance payments to support the worker should the payroll deadline be missed

What are the key legislative changes coming into effect from April 2026, and why are they being introduced?

The main legislative change, which the new labour government are introducing in April 2026 is – tackling non-compliance in the Umbrella industry

Tackling non-compliance in the umbrella company market - GOV.UK

The reasons for this Is mainly down to the industry not being regulated and HMT believes ‘certain’ types of Umbrella engagements generates a hole of £2bn of underpaid tax and NI to the government, with engagements that don’t pay the right levels of tax and NI over to the government. There has been a clampdown over recent years, however this is a further statement from the government that non-compliance engagement models are not going to remain within this sector for much longer.

How will the shift in PAYE and NIC liability up the supply chain affect recruitment agencies and end clients?

The liability currently for underpaid levels of PAYE and NIC sits with the umbrella / payroll company, and the agency/ msp’s /clients aren’t liable should a shortfall arise. HMRC confirmed Joint and Several Liability would be in-place as of April 2026 – thus meaning the umbrella company and the entity closest to the client (or the client if the engage directly) will have the J&S Liability. Ultimately, meaning if any shortfall more than one-entity on the hook, IE – if the Umbrella company ‘get it wrong’ HMRC will come after the next liable entity to recover the shortfall.

What risks do contractors face when working with non-compliant umbrella companies?

Contractors within the local government are well-versed to engaging with compliant providers – they (Public Sector 2017) where the first department to be hit with the IR35 changes, which seen the client determine the IR35 status, not the worker, meaning this shouldn’t come as a shock to local government contractors. Contractors are likely to engage with specialist recruitment suppliers who have a PSL (Preferred Supplier List) or an ASL (Approved Supplier List) – where a level of due-diligence and compliance checks have been undertaken to ensure compliant partners are only engaged with. For those workers engaged with an Umbrella who aren’t paying correct levels of PAYE and NIC, HMRC can look at collecting under-paid tax for up to 6 years.

 What protections will contractors gain under the new legislation?

Workers will have further comfort that recruitment agencies within the local government will further increase compliance with suppliers they engage with – payslip verification tools, accreditation and indemnities are becoming more of a need (than a previous want) when suppliers are wanting to support businesses. These extra compliance check-points, further underpins the contractors compliance angles, and less likely to be challenged by HMRC for backdated tax liabilities.

How will these changes affect contractor choice and freedom when selecting umbrella companies?

Contractors choice and freedom of engaging with umbrella companies, is slightly unknown in-terms of the impact these changes will have – common themes being shared across the industry may look alike a consolidated supply chain, larger Umbrella (more financial umbrella companies) to be engaged with more so than smaller ones, but for those Umbrella companies who have a long-standing presence when dealing with recession and government changes are going to be relevant when agencies are choosing partners. Workers may have a slightly smaller list to chose from, but a much overall greater reduction in potential PAYE and NIC liabilities.

What should contractors look for when choosing a compliant umbrella company in 2026 and beyond?

In-terms of the local government contractors options when choosing an umbrella company post April 2026 – some of this I have already pointed out, but the choice for them is likely to be smaller than currently. Recruitment agencies (who will hold the J&S Liability) will be only engaging with companies they feel have demonstrated the right levels of compliance, so for contractors the natural steps in choosing an umbrella company comes down to:

-          Added benefits – discount at high-street retailers, discount at petrol stations

-          Tax efficiency – does an umbrella company allow me to pay into my SIPP?

-          Private medical health care

-          Margin – the cost that is coming out of my assignment income

-          Trust pilot – understand what others are saying about the company

-          Relationship and feedback from the agency re operational and payroll processes – how flexible can the umbrella company be, should something go wrong?

What practical steps should local government contractors take now to prepare for the 2026 reforms?

Speak to the local government contractor community and listen to what your fellow peers are being advised around these reforms. Education is critical to ensure the right steps are taken to move forward with as little disruption as possible. Local government contractors should specifically speak too specialised recruitment agencies about how they are aligning to the pending changes and what advice they would be best to share.

How will these changes impact multi-assignment contractors working across different agencies?

For those contractors working across multi-assignments, there maybe little/no impact, however you maybe working with umbrella companies who don’t meet certain compliance criterias going forward, they maybe required to move to an umbrella company that does. This doesn’t mean that certain umbrella companies are doing anything wrong (there is a lot of good businesses in the umbrella market place) but some may not be able too demonstrate this to the requirements of the agency/msp/client.

What is Danbro doing to support contractors and agencies through this transition?

Danbro have supported hundreds/thousands of contractors over the past 25 years across a number of sectors and specialisms, with a number of workers engaged via a local authority. Danbro have been championing compliance throughout, and this is backed-up by our long-standing FCSA accreditation, however we are now also ‘VeriPaye’ accredited, giving total transparency to agency/client of the assignment income. Danbro are regularly communicating legislative changes to its current and previous workforce ensuring they are kept well up to date with changes. Danbro’s recruitment agency partners receive ongoing support, advice and solutions to mitigate the risk for them, the client and the wider supply chain.

Conclusion: Building Confidence Through Compliance

As the local government sector prepares for the 2026 umbrella reforms, it’s clear that compliance, transparency, and trust will become the cornerstones of successful contractor engagement. These changes aren’t just about tax and regulation they’re about protecting workers, safeguarding public funds, and ensuring that agencies and councils can continue to deliver vital services without disruption.

Contractors, agencies, and umbrella providers alike must now work together to raise standards and reduce risk. The good news? There are already providers leading the way.

We’d like to extend our sincere thanks to Michael Howard, Head of Sales at Danbro, for sharing his expertise and practical insights. His clarity on the upcoming reforms and commitment to contractor support offer a valuable perspective for anyone navigating this evolving landscape.

As always, the Truth About Local Government blog will continue to spotlight the voices, innovations, and policies shaping the future of public service. Stay informed, stay compliant and stay connected.