The IT contracting market looks set for a shake-up following the Autumn Budget 2024, with the UK government announcing changes that could potentially increase the supply and demand for outside IR35 engagements.
The changes include an announced 1.2 percentage point increase in Employers’ National Insurance Contributions (NICs) to 15%. Furthermore, the per-employee threshold at which employers start to pay National Insurance will drop from £9,100 to £5,000. Both changes will come into force from 6 April 2025.
The government has said that these changes are necessary to “repair the public finances and help raise the revenue required to increase funding for public services”.
However, for IT contractors who provide their services through umbrella companies, the changes will lead to a cut in their take-home pay if they cannot negotiate an increase in their day rates, warned Crawford Temple, CEO of umbrella company accreditation provider Professional Passport.
“This is due to the fundamental structure of umbrella company payments, where the monies received increased all employer costs,” he said. “As these costs increase, there will inevitably be less money available for workers, resulting in a direct reduction in their take-home pay.”
This might prompt some IT contractors to shop around for umbrella companies offering more favourable take-home pay rates, but Temple cautioned against this strategy.
This is because there is a risk any umbrella company touting “too good to be true” take-home pay rates will be operating non-compliantly. And IT contractors that seek them out could end up saddled with sizeable tax bills later down the line.
“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.
Matt Fryer, managing director of contracting services provider Brookson Group, which also employs umbrella company workers, said that there are steps that contractors could take to ensure they are not worse off as a result of these changes.
“To offset the damage from the NI rise, umbrella workers can explore money-saving tactics like salary sacrifice pensions or seek job opportunities outside IR35,” he said.
It is not just umbrella companies that will be shouldering the burden of increased Employers’ NICs – lots of medium-to-large businesses with full-time, permanent employees will be as well. And this might give some pause to consider if they do need quite so many permanent employees on their books or if they would be better off relying on more off-payroll workers.
According to Dave Chaplin, CEO of contracting authority ContractorCalculator, this is a trend that is already playing out in the market and could be reinforced further by the incoming Employers’ NIC changes.
“There is currently a growing move back to using limited company contractors who operate on an ‘outside IR35’ basis…because some firms have reshaped how they get work done, by packaging parts of projects into deliverables, which can be outsourced on a ‘for services’ basis.”
This trend signifies a softening in stance by these companies towards engaging contractors on an outside IR35 basis compared to several years ago, when the April 2021 reform of how the IR35 rules work in the private sector saw many firms shun the use of outside IR35 contractors.
The reforms saw contractors cede control for determining whether they should be taxed in the same way as off-payroll employees (outside IR35) or as salaried workers (inside IR35) to end-user organisations that hired them.
For many of these firms, it was an additional administrative burden they were unwilling to shoulder, so they sought to ban the hiring of contractors entirely or blanket assessed all of them as working inside IR35 as a shortcut to complying with the legislation.
Some firms also introduced hiring policies that insisted they would only use contractors who provided their services through unregulated umbrella companies.
Incidentally, the government used the Budget to announce that umbrella companies will no longer be responsible for ensuring the contractors they engage pay the correct amount of employment taxes from April 2026 due to concerns about the high levels of tax avoidance prevalent within the umbrella company sector.
Reassessing the impact of the IR35 reforms
Now the dust has settled on the reforms, attitudes are changing because businesses can see the value flexible workers and engaging outside IR35 workers can bring, said Professional Passport’s Temple.
“It is highly likely that end clients will be more motivated to reconsider the common approach on blanket bans outside IR35 and provide a more considered approach to their assessment processes, and this could very well result in more roles being considered outside of IR35,” he said.
“An accurate assessment of the status is essential and having expert support and guidance on this will be critical for those clients looking to re-evaluate the status of their roles.”
And there are certainly financial benefits to be gained for businesses that are able to supplement their permanent workforce with a supply of flexible workers.
“The contracting model allows businesses to package work into specific deliverables, bringing in skilled professionals precisely when needed,” said Chaplin.
“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.
“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.”
That said, Chaplin is not convinced the Employers’ NICs changes will lead to a wholesale cancellation of all the blanket bans firms introduced in the wake of the IR35 reforms. But it might prompt some to rethink their approach to compliance.
“The move towards more outside IR35 engagements is more of a structural change in the market, than one driven by tax,” he said.
“Do firms want to package up a deliverable for a one-time job by a contractor, or do they want someone on their books permanently, paid during downtime (for any reason) that they have onerous employment rights to contend with? I foresee a future where firms will have a thin layer of permanent employees and many associate contractors that they tap into globally.”