The Autumn Budget 2024 is shaking up the IT contracting landscape, with key changes that could boost the demand for outside IR35 contracts. Starting April 6, 2025, the UK government will increase Employers’ National Insurance Contributions (NICs) by 1.2 percentage points, pushing the rate to 15%. They’ll also lower the employee threshold for National Insurance payments from £9,100 to £5,000. The government claims these moves aim to strengthen public finances and enhance funding for services.
For IT contractors using umbrella companies, this means less take-home pay unless they can negotiate higher day rates. Crawford Temple, CEO of Professional Passport, explains how umbrella payments work: rising employer costs will eat into contractors’ earnings. This might push some contractors to hunt for better deals, but Temple warns against it. Companies offering strikingly high pay rates may not be compliant, risking hefty tax bills later.
Temple noted that the NICs changes could lead to a surge in tax avoidance schemes, as some umbrella firms promise unrealistic earnings amid a decline in legitimate income. Matt Fryer, from Brookson Group, suggests contractors explore strategies like salary sacrifice pensions or consider outside IR35 job opportunities to mitigate the effects of the NIC increase.
Medium to large firms hiring permanent employees will also feel the impact. This could lead companies to rethink their staffing needs, considering if they should lean more on off-payroll workers, especially as Dave Chaplin from ContractorCalculator points out a rising trend back towards limited company contractors. More firms are packaging projects into deliverables to outsource work, unlike a few years ago when many avoided outside IR35 contractors due to the April 2021 IR35 reforms.
Back then, firms handed control over tax status determinations to the end-users, creating resistance as companies faced additional bureaucracy and some outright banned hiring contractors or classified them all as inside IR35 for ease of compliance. Some even insisted on using unregulated umbrella companies.
In the recent Budget, the government announced that by April 2026, umbrella companies won’t be liable for ensuring proper tax payments for contractors, addressing concerns about widespread tax avoidance in this sector.
As the dust settles on these reforms, attitudes are clearly shifting. Temple believes businesses now recognize the value that flexible workers and outside IR35 roles bring. He predicts that companies will reconsider their blanket bans and more thoughtfully assess roles for IR35 status.
Chaplin points out the financial benefits of flexible contracting. By utilizing contractors, businesses can streamline projects and bring in skilled professionals exactly when needed. While contractor rates might look higher at first glance, the long-term savings are substantial—no ongoing salaries post-project, no pension commitments, and no employer NICs.
This creates a beneficial situation for both parties. Businesses gain flexibility and control, while contractors typically earn higher rates, contributing more in taxes. However, Chaplin remains skeptical that the NIC changes will lead to a complete reversal of blanket bans. He sees this as a deeper structural shift rather than merely a tax-driven reaction.
Looking ahead, he envisions companies maintaining a lean core of permanent employees, supported by a network of contractors tapped into as needed.