How 15% employer NICs will sting the umbrella company market

The fallout from last month’s Autumn Budget 2024 is significant.

And I’m not even referring to headlines like “Reeves National Insurance raid triggers scramble to move jobs abroad.”

Rather, I’m referring to the 700,000 umbrella workers who probably feel like they cannot scramble anywhere to avoid the chancellor’s £25billion increase in employer National Insurance Contributions.

So, writes Brookson managing director Matt Fryer, for both umbrella contractors and contractor umbrella companies themselves, what CAN be done before the increase takes effect on April 6th 2025?

There are four main fronts where Autumn Budget raided the umbrella company market.

Autumn Budget 2024 impact on umbrella companies is four-fold

1. An increase in employer National Insurance Contributions from (currently) 13.8% to 15% will apply from April 6th 2025.
2. While the employer NICs increase was well sign-posted in the lead-up to the Autumn Budget, what was unexpected was the chancellor also reducing the threshold at which employers start to pay National Insurance. This so-called ‘secondary threshold’ will fall from (currently) £9,100 p/a to £5,000 p/a from April 6th 2025.
3. A hefty 6.7% increase in the National Minimum Wage -- whereby the minimum wage for over 21s will rise from £11.44 to £12.21 p/h.
4. A government pledge to regulate the UK umbrella company market by April 6th 2026,  by proposing that recruitment agencies and end-clients bear the risk of unpaid tax and NIC.

Why are these four fronts so significant to umbrella contractor take-home pay?

Umbrella contractors are paid an assignment/contract rate which is agreed upon between the recruitment agency and the umbrella company, and should therefore factor in employment costs such as employer National Insurance. 

Essentially, when the umbrella company calculates its employees’ salary, the umbrella retains the statutory employer costs of employer NIC, Apprenticeship Levy and any employer pension -- as well as its margin from the assignment rate to arrive at an employee’s gross pay.

Therefore, all things being equal, the aforementioned changes to employer National Insurance would mean a decrease in an employee’s salary.

So in the wash, the chancellor’s pre-budget emphasis on protecting employee “payslips” did not extend to umbrella employees -- who of course are payslip workers.   

How do employer National Insurance changes affect umbrella contractor take-home pay?

At an assignment rate of £20 per hour (basic rate taxpayer), the reduction in take-home pay is £11 a week.

On an assignment rate of £40 per hour (higher rate taxpayer), the reduction in take-home pay is £13 a week.

With an assignment rate of £70 per hour (additional rate taxpayer), the reduction in take-home pay is £17 a week.

Assumed in the figures is a pension opt-out; no pension salary sacrifice, a £25 per week umbrella margin, employer NI of 15%, and the Apprenticeship Levy of 0.5%.

What can umbrella companies and employees do to get ahead of these changes?

• Umbrella companies need to advise the agencies that they work with HOW MUCH the minimum contract rate will be, to ensure there are no breaches to the NMW (including holiday pay).

The mandatory increase in the NMW rate means that contract rates must reflect this uplift so that umbrella company payrolls are compliant with the National Minimum Wage legislation.

• Due to the above four fronts which the chancellor is attacking on, umbrella companies are likely to be reviewing their margin to ensure they can cover their additional costs arising from the employer NICs increase on their internal staff payroll, and the inevitable cost increases passed onto umbrellas from their suppliers (e.g. payroll software providers; external advisories).

• For umbrella companies and their contractor employees, particularly those employees who will be looking to renew or take out new contracts before the start of new tax year 2025-26 (commencing April 6th2025), it is important to liaise with their agencies to see if there is scope to renegotiate their rates with clients.

A sobering statistic (from the OBR)

It is worth noting, however, that the Office of Budgetary Responsibility has estimated that 60% of the extra cost from the employer NIC increase will be passed to the worker in the first year of application.

It therefore seems unlikely that employees will fully escape the impact of the National Insurance changes.

Salary sacrifice is brought into its own by the chancellor’s employer NICs increase 

From a pragmatic point of view, to mitigate these cost increases, umbrella employees should consider using a pension “salary-sacrifice” model.

As well as the added benefit of paying into your pension pot, the contributions have the effect of reducing your taxable / NIC-able earnings. Most umbrella companies will usually pass on the employer NIC saving, by way of additional salary or contribute it to their employee pension pots.

Limited company working

It is also worth noting that contracts which fall outside IR35 present the opportunity for contractors to work via their own limited companies, thereby escaping the soon-to-be inflated employment tax costs associated with umbrella companies. 

To end-users and agencies, we would therefore advocate the removal of blanket bans on PSCs or blanket inside IR35 assessments on limited company workers, and endorse a broader approach to compliant IR35 assessments.

National Insurance changes require action not to cause a sting

It is widely acknowledged that umbrella employees have been unfairly treated as a result of the hike in employer NICs announced at Autumn Budget 2024.

And that’s only one of the four fronts that the chancellor is imposing changes onto the umbrella market!

Essentially, it is the increase to 15% that is unsettling most, as umbrella contractors face taking a direct hit to their net pay in the future.

However, steps taken now to plan for the changes can help to mitigate the impact to some extent, for example, by liaising with agencies to renegotiate contract rates, considering sacrificing salary for pension, or looking for outside IR35 roles.

Finally, it’s hardly a silver lining, but…

On a separate but more positive note, given the upcoming regulation of the umbrella company market, we are expecting a greater drive from recruiters to implement and manage preferred supplier lists of compliant umbrella companies to help ensure that contractor pay is accurate and compliant, thereby protecting the supply chain from unexpected tax bills.

It’s probably not sufficient to characterise this as a ‘silver lining’ of the chancellor’s budgetary changes; it’s more like a modicum of overdue sugar to help quite a lot of incoming and bitter medicine go down.