Transforming growth fazctor-β (TGFβ) family members regulate many developmental and pathological events through Smad transcriptional modulators. How nuclear accumulation of Smad is coupled to the transcriptional machinery is poorly understood. Here we demonstrate that in response to TGFβ stimulation the transcriptional regulator TAZ binds heteromeric Smad2/3–4 complexes and is recruited to TGFβ response elements. In human embryonic stem cells TAZ is required to maintain self-renewal markers and loss of TAZ leads to inhibition of TGFβ signalling and differentiation into a neuroectoderm lineage. In the absence of TAZ, Smad2/3–4 complexes fail to accumulate in the nucleus and activate transcription. Furthermore, TAZ, which itself engages in shuttling, dominantly controls Smad nucleocytoplasmic localization and can be retained in the nucleus by transcriptional co-factors such as ARC105, a component of the Mediator complex. TAZ thus defines a hierarchical system regulating Smad nuclear accumulation and coupling to the transcriptional machinery.