Outside IR35: What the Autumn Budget’s Employers’ NI changes mean for IT contractors

The IT contracting market is poised for a shake-up post the Autumn Budget 2024, with the UK government unveiling changes that could potentially impact the supply and demand for outside IR35 engagements.

The changes include a 1.2 percentage point increase in Employers’ National Insurance Contributions (NICs) to 15%. Additionally, the per-employee threshold for employers to start paying National Insurance will decrease from £9,100 to £5,000. Both changes are set to take effect from 6 April 2025.

The government has cited the need for these changes to “restore the public finances and generate the revenue necessary to enhance funding for public services.”

However, for IT contractors operating through umbrella companies, these changes may result in a reduction in their take-home pay if they are unable to negotiate higher day rates, cautioned Crawford Temple, CEO of Professional Passport, an umbrella company accreditation provider.

Temple explained, “Due to the underlying structure of umbrella company payments, increased employer costs will ultimately lead to less money available for workers, resulting in a direct decrease in their take-home pay.”

While some IT contractors may consider exploring alternative umbrella companies offering better take-home pay rates, Temple advised against this approach.

He warned that umbrella companies offering overly attractive take-home pay rates may be operating non-compliantly, potentially leaving contractors with substantial tax liabilities in the future.

As per Matt Fryer, managing director of Brookson Group, contractors can mitigate the impact of the NI rise by exploring cost-saving strategies such as salary sacrifice pensions or seeking opportunities outside IR35.

It’s not just umbrella companies that will bear the brunt of increased Employers’ NICs – many medium-to-large businesses with full-time employees will also be affected. This could prompt businesses to reassess their reliance on permanent employees and consider leveraging more off-payroll workers.

Dave Chaplin, CEO of ContractorCalculator, noted that there is a growing trend towards engaging limited company contractors operating outside IR35, as businesses restructure their project workflows to outsource specific tasks to contractors on a service basis.

This shift indicates a shift in attitude among companies towards engaging contractors outside IR35 compared to the aftermath of the April 2021 IR35 reforms in the private sector, where firms largely avoided using outside IR35 contractors.

Following the reforms, contractors relinquished control over determining their tax status (inside or outside IR35) to end-user organizations. This administrative burden led some firms to cease hiring contractors or categorize them all as inside IR35 to comply with the legislation.

Some firms even mandated that contractors work through unregulated umbrella companies. However, the government announced in the Budget that umbrella companies will no longer be responsible for ensuring contractors pay the correct amount of employment taxes starting April 2026, due to concerns over tax avoidance in the sector.