Are umbrella contractors shouldering higher employer NICs?

It came into force just a few days ago; Sunday April 6th 2025.

But the employer's National Insurance Contributions increase from 13.8% to 15% was actually unveiled back in October at Autumn Budget 2024, alongside a reduction in the threshold from £9,100 to £5,000. This new lower £5k limit is the point at which the higher 15% rate now applies.

While on the surface, it’s a tiny 1.2% rise, the reality is that the jump to 15% equates to an 8.7% tax increase, triggering hefty implications for umbrella companies and in turn umbrella contractors, writes Ciaran Woodcock, commercial director at SG Umbrella.

How 15% employer NICs hits the average UK salary

First, some context. The average UK salary is projected to be around £37,000 in 2025. In the 2024-25 tax year, this would equate to approximately £3,850 in employer NICs.

Carrying this salary into 2025-26, employer NICs (at the new rate) will cost around £4,800. That’s a difference of roughly £950 over the tax year.

Employer NICs of 15%: the umbrella user impact

While these changes affect employers nationwide, they impact contractors using umbrella companies as well.

If you’re an umbrella contractor, employer NICs are deducted from your day rate, as your Key Information Document ought to outline. The 8.9% hike therefore means a significant new drop in your take-home pay.

Understandably, contractors working via an umbrella company are not happy with this reduction in their take-home. As a result, such brolly contractors are considering various elements of the temporary labour supply chain for solutions to minimise the impact.

At the same time, other affected parties in the supply chain aren’t over the moon either.

Email ultimatum: a left-field agency response to higher employer NICs

An email sent from a recruitment agency points to the disquiet, while at the same time outlining a rather left-field, impractical solution.

The email, sent on the eve of the 2025/26 tax year, is reproduced below:

Dear Sir/Madam,

Ahead of the upcoming increase in Employer's National Insurance contributions next month, [our agency] will not accept any increases to existing or new rates. Likewise, we will not permit any reductions in workers' pay rates and expect all umbrella company suppliers to absorb the increase within their existing margins.

To confirm your acceptance, please sign and return this letter no later than… [date]. Failure to do so will result in removal from our Approved Supplier List.

Those unfamiliar with the umbrella market and how a compliant umbrella company operates may think this ultimatum seems like a logical response. After all, umbrella companies are the employer, and as such, the employer’s National Insurance sits with them.

However, the reality is that umbrella companies, although acting as employers, are primarily payroll processors.

Umbrella companies and their margins

Umbrellas’ only source of revenue comes from the margin they charge (usually between £15-£25 per week). It therefore seems more likely that to absorb the 8.9% leap in employer NICs, umbrella companies will look to increase their margins.

Since umbrella companies are, ultimately, unlikely to absorb the cost, contractors will often shift the conversation about who should shoulder the new 15% rate up the supply chain, towards the recruitment agency.

The hot potato of higher employer NICs

But agencies have had a tough few years since the pandemic, with recruitment figures only now apparently approaching pre-pandemic levels.

With inflation driving wages up and end-clients reluctant to pay more, agencies have already been reducing their margins to remain competitive. While some agencies can absorb some of the increase, this would only be a short-term solution -- especially as agencies will also face the impact of the employer NICs rise themselves, on their own staffing/employment costs.

Should end-clients shoulder the greater HMRC liability?

Therefore, contractors are surely likely to come to the conclusion that a ‘solution’ to the greater tax liability must come from end-clients.

For those contractors whose skills and expertise are in high demand, we have found that end-clients are more than willing to increase the day rate offered to counteract the reduction in take-home, pay due to the employer's NICs increase.

No time like the present to draft an uplift calculation

My advice to any contractor looking to mitigate the decrease in their take-home pay is to start the conversation, firstly with their umbrella company, now.

While umbrella companies cannot absorb the cost themselves, they can provide contractors and recruitment agencies with an “uplift calculation,” detailing the new day rate required to maintain the previous take-home pay level.

Asking an engager for more isn’t easy but it’s the lesser evil

From a recruitment agency perspective, reaching out to clients to discuss an increased day rate is never an easy task.

Yet the alternative -- having a contractor who feels unfairly burdened by higher employer’s NICs, leading to demotivation or seeking an alternative contract -- is often far worse for the end-user.

Our umbrella company has already been assisting many of our contractors and agencies by providing them with accurate calculations on what the uplift ought to look like, in real-terms.

The uplift calculation ensures they can approach their clients with well-informed discussions, often resulting in positive outcomes.

Three steps to unlocking a pay rise to mitigate rising employer NICs

We’re finding that the key to unlocking an employer NIC-busting pay increase is three-fold, specifically:

• engage with clients early (i.e now);
• give as much notice as possible, and;
• provide accurate uplift calculation(s) of the increase(s) required.

If not already, then at renewal…

If this conversation hasn't happened yet, all is not lost.

This uplift calculation can form a key part of negotiations when contracts come up for extension or at renewal stage.

Lastly, keep an eye on compliance amid new NICs pressure

Finally, it is also important for both contractors and agencies to keep their umbrella company fully informed about any changes to the day rate.

Such a keeping-in-the-loop exercise not only ensures a smooth payroll process but also allows the umbrella company to issue an updated Key Information Document, ensuring the agency remains fully compliant with legislation. The last thing supply chains will want at a time of increased costs is a compliance probe.