Is Labour just going to leave limited company contracting zombie-like, neither dead nor alive?

While many contractors will be hoping beyond hope that Autumn Budget 2025 reverses their fortunes, it’s hard to escape the sense that limited company contracting has entered something of a zombie state.

Once a thriving model for the professional freelancer, limited company freelancing isn’t what it used to be, writes Fred Hicks, director of policy at The Association of Independent Professionals and the Self-Employed (IPSE).

Taxing times for PSCs: Dividends, then employer NICs

Once generous dividend tax rates have been eroded, leaving many company directors questioning whether the hassle of running a company is worth it.

There have even been reports in the FT of company directors leaving the UK altogether -- some 3,790 of them, up 40% from 2,712 a year ago, as a direct result of chancellor Rachel Reeves’s Autumn Budget 2024.

The government’s changes to employer National Insurance thresholds have also bitten contractors.

Higher HMRC tax bills, and higher fees from Companies House

The recent cut to the employer NI threshold applies to all companies, yet the ‘owner-operator’ companies have been excluded from the uplift to the Employment Allowance, meaning they’re paying a higher Employer NI bill for themselves than before.

[Editor’s Note: One job site reportedly indicated last week that there’s been an uptick in independent roles since the employer NICs changes of April 2025. However, a fair few contractors ‘on the ground’ don’t sound convinced that the site’s uptick equates to a spike in B2B limited company engagements.]

Companies House fee increases have also been an irritant for contractors running their own incorporated business. While price increases alone won’t break the proverbial camel’s back, it’s definitely one of the straws.

IR35 reform still hasn’t gone the way of Class 2 NIC

And at this stage, with ContractorUK readers in particular, I needn’t labour the point on the IR35 reforms, which sparked an exodus from the sector and resulted in reduced incomes and fewer opportunities for those who stuck it out.

All the while, sole traders have seen their position marginally improve.

A series of incremental Class 4 National Insurance reductions and the abolition of Class 2 contributions have made the simpler sole trader route more attractive.

But limited company contracting (also known as ‘PSC’ or Personal Service Company freelancing) continues to be the only way for many contractors to continue working independently, primarily because it’s a means of being secure, and ‘legitimate’ as a solo business.

The limited company model is far from limited in its advantages

Not having an incorporated business name can carry an undeserved prejudice, even getting in the way of winning lucrative opportunities.

We believe limited liability protection remains as important to the solo consultant as it does to a multi-million-pound enterprise.

Knowing that personal assets are not ‘on the line’ is indispensable for entrepreneurship, especially in the nation’s high-performing finance and tech sectors.

Limited company contracting? It’s unfortunately in a zombie-like state

And so, limited company freelancing now exists in a zombie-like state. It shuffles on, neither fully alive nor completely dead.

What government and HMRC currently call the ‘Personal Service Company’ sector needs a more settled, stable status if it’s to ever get back on its feet.

Historically, a barrier to even considering doing this has been a lack of hard data on the sector.

New ‘reasons for incorporation’ research by HMRC vindicates PSCs

But a lack of information is becoming less of an obstacle.

That’s especially true thanks to the government quietly publishing its own research into company owner-managers.

It’s research that has put numbers on the arguments we’ve all made to officialdom for years.

Top 3 reasons people set up a limited company

The top 3 reasons for incorporating according to new HMRC research, published on July 17th 2025 (but commissioned by the previous Conservative government), are:

1. Limited liability protection (36%).
2. Giving the company a formal structure (36%).
3. Recommendation by an accountant (31%).

Credibility (25%) and eligibility for certain contracts (21%) were also both more important to directors than potential tax and national insurance savings (20%).

That seems to blow a hole in overstated claims from some quarters of ‘tax-motivated incorporation.’

The case for our Freelancer Limited Company proposal  

Understanding these motivations was what prompted IPSE to develop the concept for a Freelancer Limited Company with the support of our members and EY, the ‘big four’ accountancy firm, a decade ago.

Right now, the Freelancer Limited Company (FLC) is not a policy that we are actively pursuing.

But the main thrust of the concept -- that freelancers could benefit from a secure, protected status, as is the case across the other major European economies -- shouldn’t be dismissed out of hand.

665,000 personal service companies are now actively trading in the UK

We now even have a reliable estimate of the size of the personal service company sector -- 665,000, based on a representative sample survey from March 2023.

For a sector that’s been hit hard in recent years by tax hikes, IR35 reforms and a shortfall in support during the pandemic, it’s remarkably resilient.

But it’s still struggling to grow both its headcount and its value.

PSCs deserve a unified policy strategy from Labour

In the current conditions, it’s hard to see how this stagnation will change without a focused, unifying strategy from the government, to untangle freelancers from the web it’s created for them over the years.

The self-employed are typically catered for through a patchwork of reforms, and the diversity of the sector means that will always be the case to some extent.

This government’s freelancer focus still feels blurry…

However, having published industry sector plans, an Employment Rights Bill, and an as-yet-unpublished ‘small business strategy,’ it feels like the professional freelance sector is still not getting the policy focus from Labour that it needs. Whether the government’s new anti-late payments package represents a turning of the policy corner remains to be seen. And Autumn Budget 2025 is probably the ultimate litmus test, so almost needless to say, we’ll be submitting our Budget representation to the chancellor as soon as the date is announced.