The Chancellor, Rachel Reeves, has announced her much anticipated Budget which contained £40 billion of tax rises. These tax rises will be used to fill an apparent “£22 billion black hole” in the country’s finances and drive growth in the UK economy.
Looking at the positives, we expect to see significant Government investment in building new infrastructure, improving employment prospects and skills, research and development in sciences and maximizing growth in clean energy. These are all areas which rely on the flexible labour market so will no doubt present opportunities for the private sector, including recruiters and contractors alike.
Employers National Insurance
In terms of the make up of the £40 billion of tax rises, 60% of this is made up by the increase in Employers National Insurance. This presents a significant increase in costs to employers and was positioned as a tax rise that will not impact the worker.
Whilst this is the case for most “traditional” employees, it is unfortunately not so for umbrella company employees who will see a reduction in take home pay from 6 April 2025 unless their assignment rates are adjusted to take into account the 1.2 percentage point increase in the rate of Employers NIC, from 13.8% to 15%. An unexpected nuance to this change was the reduction in the threshold by which employers are required to pay Employers NIC, from £9,100 to £5,000 per year for each employee which further exacerbates the increased cost.
Umbrella company employees should consider utilising pension salary sacrifice to save for retirement in a tax efficient manner, reducing their taxable income and thereby reducing their total tax and NIC exposure. In doing so, I would recommend that they seek advice from a Financial Advisor and ensure that their umbrella company does not retain any benefit from the Employers NIC saving which should be passed in full to them as additional salary or into their pension pot.
Contractors working via a Personal Service Company (PSC) will largely be unaffected by this increase in National Insurance as they are able to manage their remuneration strategy to optimise the level of their director’s fee relative to tax and NIC. This is, of course, one of the key benefits of working via a PSC.
Tackling Umbrella Company Non-Compliance
There was no announcement today in respect of the off-payroll rules (IR35), so we don’t expect to see any further changes to these. We do, however, welcome today’s announcement that the new Government will progress with plans to tackle non-compliance in the umbrella company market. From the information published today the plans appear to be placing the risk of non-payment of PAYE by unscrupulous umbrella companies firmly at the door of the agencies that use them (or the end client if no agency is in the supply chain). The mechanics of how this is proposed to work appear to be a little confused and are not entirely clear at this stage. We have been contacted by HM Treasury today seeking our engagement on this matter which we will of course undertake and will provide further details once these become available (expected in the next few months). Any changes are planned to take effect from April 2026.
Summary
In summary, today saw a further raid on the take home pay of contractors working inside of IR35 and the start of the crystallization of additional risk for end clients and agencies placing contractors on inside IR35 contracts. Now would be a good time for supply chains to review their approach to the off-payroll rules to ensure all contracts are correctly categorized and avoid any unnecessary risk and increased costs associated with incorrect inside IR35 determinations.
