25 Nov How the Employers’ National Insurance increase will have a knock-on effect for contractors
In Labour’s first budget in 14 years, the Chancellor, Rachel Reeves, announced tax changes intended to raise billions of pounds to fund investment in public services such as transport, housing and the NHS. Whilst individuals will not be subject to tax rises themselves, as promised in their manifesto, their employers will face increases in the amount of National Insurance contributions they are expected to pay. Here we look at the implications of this rise and what effect it will have on contractors.
The details
Employer National Insurance Contributions (NICs) are going up by 1.2 percentage points from 13.8% to 15% from 6 April 2025. This per-employee Secondary Threshold rise will affect salaries above £5,000 instead of the current tax situation which is 13.8% on salaries above £9,000. The measure is expected to raise £20 billion per year and is one of the biggest single tax-raising measures in history.
In order to protect smaller businesses the government also plans to increase the Employment Allowance from £5,000 to £10,500 and remove the £100,000 threshold, expanding the scheme to all eligible employers. This will have the result of taking 865,000 employers out of the situation where they pay any NICs in the next tax year.
Also from April 2025 the National Living Wage (NLW) will increase to £12.21 per hour, a 6.7% increase, and the National Minimum Wage (NMW) (for 18-20 year olds) will rise to £10.00 per hour, a 16.3% increase. This will especially benefit women who represent around 60% of all minimum wage jobs.
How will this affect contractors?
Most commentators agree that contractors (temporary workers who operate through a PAYE umbrella) will see a reduction in their take home pay. For example, if an assignment rate is £20 per hour, for a basic rate taxpayer, the reduction in take home pay will be £11 per week. For an assignment rate of £40 a higher rate taxpayer will find their take home pay reduced by £13 per week. And with an assignment rate of £70 per hour, an additional rate taxpayer will see their take home pay reduced by £17 per week.
Contractors working inside IR35 or via an umbrella company gain nothing, for example, but will absorb the increased employer NI contribution and be instantly worse-off to the tune of £615 per year caused by the new secondary NI threshold, plus £12 per £1,000 income.
There are real concerns that this increase in Employer NIC will impact clients who rely on contractors’ services and umbrella companies will have to pass this cost onto contractors themselves, reducing the rate at which they are paid. This is because, despite being their employer, the umbrella company does not directly benefit from the contractor’s employment (the client does) and cannot cover the rise in Employer’s NIC, therefore the increase is passed on to the contractor who will see their employment costs deducted from their assignment rates, and will be taking home less money.
Clients may also be affected if contractors increase their rates to cover the reduction in their take home pay, leading potentially to fewer contracts being available, the clients outsourcing from other agencies, or reducing the number of contractors they engage.
Potential benefits
There are, however, some positives from this situation.
If employers are required to pay more for full-time employees, there may actually be a rise in the demand for contractors working off-payroll and a re-think on the ban on contractors outside IR35 that many organisations have instigated over recent years. Organisations may find that having a flexible contingent workforce with which they can supplement their core employees works better for them, financially and structurally. The lack of ongoing salaries, Employers’ NIC and pension contributions may outweigh the day rate that many contractors charge, creating an additional employment option for clients.
Another potential benefit for contractors is that their recruitment agents can negotiate an uplift in their rate, to compensate for their loss of earnings.
Potential pitfalls
One thing that contractors should be aware of, however, is the temptation to join an umbrella company that promises ‘higher-than-usual’ take home pay to balance out any losses they might incur. These can often be tax-avoidance schemes (which we discussed recently [LINK]) which are operating in a non-compliant manner and which can lead to hefty tax bills and/or fines in the future.
How an umbrella company can help
It can be confusing to make sense of the different rates that recruitment agencies sometimes offer contractors. The reason they do this is to accommodate both traditionally employed workers and those who work through an umbrella company – rates for umbrella workers are advertised as higher than PAYE to cover the employment costs that umbrella companies have to pay. Here at i4 we like to make our contractors’ lives simple, so have prepared a sample timesheet which explains all the employment costs we’re liable for and the statutory deductions we’re required to make. You can find an example here. We do this to be as open and as honest as possible.
We’ll also ensure that you legally maximise your income, while paying all the tax you need to and, as you’re our employee you’ll be entitled to a range of employee rights including holiday pay, paternity/maternity pay, sick pay, a workplace pension and insurances, protecting your rights as an employed person.
For more information about how working through an umbrella company can benefit you call us on 0800 084 3058, email us at info@i4services.uk or fill in the contact form here.