Some contractors will doubly impacted by the rise in ENI tax, but is Rachel Reeves well aware of it and not care?
The recent hike in employers’ national insurance tax has sent ripples through the contracting world, leaving many unsure of whether to celebrate or brace for impact. While some contractors may find themselves with unexpected benefits, others could be facing a hefty financial blow. But the implications go even deeper than individual wallets.
This tax change has inadvertently opened a lucrative window for those who design tax avoidance schemes, potentially undermining the very policies put in place to combat them. How can one tax hike create such a complex and contradictory environment?
In this article we explore the multifaceted impact of this change on contractors, exploring the nuances of worker status and the potential for both gains and losses.
Chancellor Rachel Reeves set out measures in her first Budget to plug the UK’s public spending gap, by increasing employer’s national insurance and promising to clamp down on the promoters of non-compliant umbrella companies that facilitate tax avoidance. However, certain contractors are feeling especially unloved by the Chancellor’s announcements.
IPSE, the self-employment association, has described the Chancellor’s changes to employer’s national insurance in today’s Budget as a “hammer blow” for contractors employed by an umbrella company.
Andy Chamberlain, Director of Policy at IPSE, said in a statement: “The Chancellor’s changes to employers’ national insurance will leave a huge dent in the finances of more than 700,000 umbrella company workers, who cover the cost of employers’ national insurance through their rate of pay.”
Reeves announced an increase in employers’ national insurance contributions from 13.8% to 15% effective from April 2025. Reeves also made the “difficult” choice of bringing down the threshold employers must start paying national insurance on employees’ earnings from £9,100 to £5,000.
However, the employment allowance for 865,000 small businesses will not pay any national insurance next year given that Reeves raised the employment allowance from £5000 to £10,500. One million small businesses will pay the same or less. According to a Construction News report, this would mean a small business could employ four full-time workers on the national living wage without paying any national insurance on their wages.
IPSE’s Chamberlain explained the implications: “Not only will [umbrella contractors] be covering a higher headline rate of employers’ NI from next April, but they’ll be paying it on an extra £4,100 of their earnings. For many umbrella workers, this will cost them in excess of a thousand pounds per year.”
Chamberlain described this move as a “hammer blow” for umbrella company workers – “many of whom have been forced into these companies due to IR35 tax rules – and is a clear breach of the government’s pledge not to raise taxes on working people.”
Crawford Temple, CEO of Professional Passport said the Chancellor’s choice to raise the tax rate of employers NICs, coupled with a reduction in the threshold, will have a “detrimental impact” on workers operating through umbrella companies.
He explained, “This is due to the fundamental structure of umbrella company payments, where the monies received include all employer costs. As these costs increase, there will inevitably be less money available for workers, resulting in a direct reduction in their take-home pay.”
Tax avoidance schemes to take advantage in record time
Temple finds the tax hikes together with the increase to the employment allowance could inadvertently strengthen the position of non-compliant providers in the market.
“These changes to the NICs threshold will open the floodgates for tax avoidance schemes to proliferate, as unscrupulous umbrella companies promise unrealistic returns to workers who are seeing their legitimate earnings decrease,” said Temple.
As previously reported by The Freelance Informer, the newly proposed legislation announced today aims to tackle umbrella company tax avoidance by taking away the legal responsibility to account for PAYE payments from umbrella companies to recruitment firms and end clients when no recruitment agency is involved.
“This move will certainly change the shape of the market and as well as presenting a number of challenges to agencies will also ramp up the need for robust enforcement measures in the run-up to April 2026,” said Temple.
He warned, “The next 18 months will undoubtedly witness a drive by the architects of tax avoidance schemes to make as much money as they can. So the message is clear, visible and targeted enforcement is imperative to drive up standards and drive out the cowboys giving our industry a bad name. We need action and enforcement not pledges and promises.”
Good news for some contractors
Dave Chaplin, CEO of contracting authority ContractorCalculator sees an inadvertent silver lining for some contractors in the rise in ENI hikes.
“The increase in employers’ National Insurance Contributions announced today reinforces a clear solution for businesses – hire independent contractors,” said Chaplin.
The IR35 specialist said following recent Supreme Court clarification on employment tax status issues, “Firms can confidently engage self-employed contractors without unnecessary concern over tax status.”
Chaplin is confident that the contracting model allows businesses to package work into specific deliverables, bringing in skilled professionals precisely when needed.
“While contractor day rates may appear higher than permanent staff costs, the long-term savings are significant – there’s no ongoing salary commitment once a project ends, no pension contributions, and critically, no employers’ NICs to worry about,” he said.
He continued, “This creates a win-win situation. Businesses gain flexibility and cost control by accessing talent on tap, while contractors typically earn higher rates and contribute more to the Treasury through their tax payments.”
A hike to employers’ NI could also encourage bigger businesses to rethink their stance on IR35 and become a “a catalyst” for freelancer and contractor opportunities, said Qdos, an IR35 specialist.
Qdos said in a statement, “The increase in employers’ NI to 15% – currently 13.8% on employee earnings over certain thresholds – means employers will pay more tax for each payrolled member of staff from April 2025. However, contract workers engaged ‘off-payroll’ are not subject to the tax. This could incentivise businesses to engage these flexible workers and reverse contractor bans enforced upon the introduction of the off-payroll working rules in 2017 and 2021.”
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