Autumn Budget 2024: Umbrella companies hit, Employer NICs hiked, and BADR heading for 18%

Rachel Reeves today hit both umbrella and limited company contractors at Autumn Budget 2024, as part of a £40billion tax hike.

In her budget speech, the chancellor said the government would hit “umbrella companies” who “exploit workers” from April 6th 2026.

Alongside “going after” tax avoidance scheme promoters, Reeves said the umbrella crackdown would raise £6.5billion a year.

‘Umbrella market non-compliance’

Tackling umbrella “non-compliance” by “moving PAYE obligations” to agencies, or end-users if there’s no agency, will raise £2.8bn in total.

“[This] will protect workers from large, unexpected tax bills caused by unscrupulous behaviour from non-compliant umbrella companies,” states Autumn Budget at chapter 5.62

“The government is publishing a policy paper alongside the Budget that provides further information on this measure.”

‘Difficult choice’

Also in her speech, the chancellor said the government would raise Employer’s National Insurance, by 1.2%, to 15% from April 6th 2025.

To audible gasps in the House of Commons, Reeves added that the secondary NI threshold will fall, from currently £9,100 to just £5,000.

When combined, the changes to Employer NICs which the chancellor called a “difficult choice” are projected to raise £25billion a year.

‘Protect our smallest companies’

More positively, the Employment Allowance will be increased, from £5,000 to £10,500 to “protect our smallest companies”, Reeves said.

However, the chancellor did not announce eligibility changes to the EA, meaning one-person limited companies will continue to be excluded.

Further thwarting limited companies, Reeves said that while BADR will remain intact, the 10%  CGT rate which it returns won’t forever.

In fact, CGT rates via Business Asset Disposal Relief will rise to 14% in April 2025, then to 18% in April 2026, raising £2.5bn by the end of the parliamentary period.

‘Autumn Budget 2024 is unsurprising but very disappointing for contractors’

So Reeves just sent an “unsurprising yet still very disappointing message to contractors and small business owners,” Steve Strain, a veteran IT contractor told ContractorUK.

A former tech contractor, Chris Bryce, who is now the CEO of the Freelancer & Contractor Services Association agrees.

“Reeves’ announcement of employer NICs – ErNICs -- increasing to 8.7%...is effectively a tax on jobs,” Mr Bryce told ContractorUK.

“It will inevitably lead to higher prices, stagnating wage growth, less hiring, and even potential redundancies.

“For umbrella employees in particular, the increase is likely to have a direct impact on take-home pay, as many end-clients will be reluctant to increase assignment rates.”

‘Umbrellas suddenly have a lot a of work to do’

Further tightening the screws on umbrellas, Reeves said the National Living Wage is to rise to £12.21 an hour.

The National Minimum Wage for 18-20-year-olds is also increasing, to £10.00 per hour, representing an increase of 16.3%.

Bryce reflected: “Add in the increase to the NLW/NMW to the ErNICs hike, and umbrellas and employment businesses suddenly have a lot of work to do to try to make sure that contractors aren’t affected.”

‘Mini-umbrella scam just got a whole lot more profitable’

The FCSA’s CEO also said he fears that the enlarged EA constitutes a “vast increase in the incentive to fraudulently obtain” the allowance.

“The mini-umbrella scam just got a whole lot more profitable,” he said.

“[Our organsiation] works hard to stamp them out, and this will make our work even more crucial.”

‘Employer NICs increase is most impactful measure’

Matt Fryer, of Brookson, called the employer NICs increase “the most impactful announcement of today’s Autumn Budget”.

Accounting for £25bn of the budget’s £40bn tax rises, Brookson’s boss said of the move to ContractorUK:

“Autumn Budget unveils a 1.2% rise in Employer National Insurance and a reduction in the NI secondary threshold from £9,100 to £5,000. 

“This was somewhat expected, albeit a 2% increase with no change to the threshold was muted by many. 

“While in most instances this increase will not impact an employee’s take-home, this is not the case for umbrella employees. 

“The basis for an umbrella employee’s salary is the assignment or contract rate agreed between their recruitment agency and the umbrella company which employs and pays them. 

“And this assignment rate should factor in employment costs such as Employer’s NIC.”

‘Uplift in assignment rate to cover the additional costs’

Fryer reminded that the umbrella company is legally responsible for ensuring all necessary employment costs (of which ErNIC is the predominant one), are retained from the assignment rate before calculating the gross salary. 

“If employment costs increase, this will decrease the salary; assuming no uplift in the assignment rate to cover the additional costs,” he says.

“Should an umbrella employee’s assignment rate not be increased to cover a 1.2% point increase in ErNIC -- and the impact of the reduction in the secondary NI threshold -- the impact on their take-weekly take-home [is in double-figures a week and varies].”

‘Weekly umbrella payslip dents of £11, £13 and £17’

According to Brookson, 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 is £13 a week.

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

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

‘Consider using salary-sacrifice pension contributions’

To mitigate this additional cost, Brookson recommends umbrella company employees speak to their agency to see if there are any plans for them to renegotiate the total charge to their clients.

Alternatively, umbrella contractors should “consider using salary-sacrifice pension contributions” which will have the effect of reducing their taxable and NICable earnings, thereby reducing the tax and NIC they pay, advised Fryer, adding:

“Most umbrella companies either pass on the Employer’s NIC saving to their employees as additional salary or contribute it into the pension.

“If exploring salary sacrifice, it would be wise [as a contractor] to consult with your umbrella company employer to ensure that all of the ErNIC reduction is passed on -- and [make sure] not all or part of it is retained by the umbrella company as a ‘hidden’ additional margin.”

‘Slashed’

Tom Wallace, director of tax investigations at WTT Group echoed the need for umbrella contractors to take action.

He told ContractorUK: “[With] Employer’s NIC being raised and the threshold where it starts to be paid being slashed, umbrellas will need to account for, and secure, necessary margin increases to pay additional amounts.

“This will mean an inside IR35 contractor’s take-home will be reduced unless a raise in day rate can be negotiated.”

‘Driver of tax avoidance’

Formerly of HMRC, Wallace says “normally” such a move would be a “driver for [tax] avoidance to enter the supply chain, offering a higher take home.” 

“However, the accompanying new rules that will prevent agencies from outsourcing their PAYE obligations to umbrellas will have a positive effect on non-compliance,” he hopes.

‘Chancellor just put agencies now on notice’

In a statement after Reeves’ own statement, Wallace continued:

“While umbrella companies can of course still be used, their remit may be reduced and at the same time, clients are likely to be seeking great assurances that obligations to tax deductions are being met, in addition to the usual indemnities for worker error.

“Although only taking effect from April 6th 2026, this puts agencies on notice that they must secure their supply chains and leaves umbrellas to re-define their place in the market”.

‘Umbrella crackdown proposals need to be examined in detail’

At the FCSA, there is a cautious approach to the umbrella regulatory plan, however.

“The proposals to tackle unscrupulous umbrellas are substantive and need to be examined in detail.

“At first glance, they appear to be difficult to implement and will need in-depth consultations,” Mr Bryce says.

“We agree with the government’s view that ‘businesses that continue to outsource payroll operations to umbrella companies will take steps to ensure that these obligations will be correctly met on their behalf.’”

Pointing to HMRC’s newly published ‘Tackling non-compliance in the umbrella company market,’ Bryce said those steps could include undertaking due diligence checks or putting in place legal indemnities.

‘Clear signs government and HMRC are targeting worker exploitation’

The Association of Professional Staffing Companies is just pleased that at least there is progress to clean up the brolly space.

“The planned clampdown on unscrupulous umbrella companies and promoters of tax avoidance are clear signs that the government and HMRC continue to have their sights set on those that are exploiting workers and the system.

“[And that is despite] no mention of umbrellas in their manifesto,” APSCo director Tania Bowers told ContractorUK this afternoon.

“Contractors need to be aware of the growing risks in the marketplace in terms of unscrupulous umbrellas. 

"In addition, the employment allowance has been relied on by some umbrella companies in the past to reduce NICs by artificially placing contractors into SMEs, often called ‘mini umbrellas’.

“With the employment allowance going up alongside NICs increases, to support genuine micro and SME businesses, it is almost inevitable that some unscrupulous actors will look to take advantage of the allowance.”

‘Contractors must take ownership of their tax payments’

Bowers further warned that recruiters are directly at risk through the Criminal Finances Act 2017 and HMRC's enforcement of it.

“But [it is] contractors [who] must take ownership of their tax payments and ensure they know the tax they need to pay, to not be at risk of falling foul of these schemes and being pursued by HMRC in future years,” she says.

‘Long-overdue’

Charlie Hemsworth of IR35 advisory Bauer & Cottrell is equally cautious, despite similarly backing the umbrella crackdown in principle.

“These measures to regulate exploitative and non-compliant umbrella companies are welcome and long-overdue,” she began.

“However, while the agencies/end clients being responsible for the PAYE protects workers, it also places yet more red tape and administrative burdens on those parties.

“It’s vital that these measures don’t inadvertently reduce opportunities for contractors by further complicating recruitment processes.”

‘Butchering’

Going further than diplomatically expressing concern about the pressures on umbrellas increasing is Rob Sharp, CEO of Orca Pay Group.

In a statement, he told ContractorUK: “I am delighted [the targeting of non-compliant umbrella companies] has finally been said out loud in parliament.

“I think what this very, very clearly shows supply chains is that we are truly about to enter the ‘real-time audit’ era.

“It is going to be the only way to afford supply chains the elimination of risk, ensure compliance and biggest of all ensure that contractors are being paid correctly and compliantly.

“But in the Commons, in a blink of an eye, Reeves just increased the Employment Allowance by 100% which will make ‘mini umbrella fraud’ even more attractive and more common.

“The chancellor then butchering the Employer NI threshold, while raising the rate, is going to have a profound impact on employment, and I fear it will cause mass job casualties and a lack of growth. It’s just comical really. The government don’t understand how our market works at all.”

‘Positive developments for contractors’

Speaking to ContractorUK, Seb Maley, of Qdos, reacted from the opposite end of the spectrum, saying the ErNICs rise was among Autumn Budget’s “positive developments for contractors.”

“One of the major takeaways is the increase in Employer NI.

“The rising cost of hiring employees has the potential to drive demand for contractors, who can be engaged off-payroll and often in a more cost-effective way.  

“As many know all too well, some businesses took a needlessly risk-averse approach to the off-payroll rules.”

‘Potentially reverse contractor bans’

Qdos’s CEO further explained: “They gave contractors little choice but to work on the payroll or have their contracts cancelled. While burdening employers with greater costs isn’t going to be a popular move among businesses, it could encourage them to rethink and potentially reverse contractor bans.”

As to Autumn Budget’s other positives, Maley cited Reeves announcing no further freezes in the personal ‘tax-free’ allowance.

‘Three more years of frozen personal tax allowance’

But Carolyn Walsh, a former tax inspector, isn’t impressed the status quo wasn’t changed.

“We will suffer frozen personal allowances for another three tax years,” she said, referring to Reeves not adding to the existing freezes announced by the previous Tory government.

“This was the first Labour budget in 14 years, and the first Budget delivered by a woman, so she had cause to smile as much as she did.

“But Reeves’ Autumn Budget case is filled with shattered dreams.

“Contractors working inside IR35 or via an umbrella company gain nothing, for example, but will absorb the increased employer NI contribution and be instantly worse-off to the tune of £615 per year caused by the new secondary NI threshold, plus £12 per £1000 income.”

‘Good times are never going to roll in the contracting sector’

Now boss at Oblako Ltd, Walsh continued to ContractorUK: “And although the new rate of employment allowance -- £10,500 -- will help very small employers… one-person companies are left out in the cold.  

The contracting sector has to face it.

"The good times are never going to roll.”

‘Restricting BADR’

Asked for its reaction to Reeves’ unveilings, DNS Accountants echoed: “Small business will continue to struggle under Autumn Budget 2024.

“Higher Employer NI hurting umbrella employees as umbrella themselves get regulated.

“And while a new CGT restriction to 24% is not draconian…restricting BADR can be quite risky for IHT purposes and many business owners may consider exiting [before the CGT rate under BADR increases from April 2025].”

‘Squeeze the juice’

DNS’s Sid Agarwal added: “So overall, Labour’s first budget since 2010 is a massive attempt to squeeze the juice from business while not giving much to enterprise to actually get on with business.”

Jenner & Co observes that corporation tax rates were not changed at the Autumn Budget however, with Reeves helpfully capping them at 25%.

“Contractors will be relieved [CT isn’t going up], and there was no mention of any increases to dividend tax rates either,” Jenner & Co’s Lisa Somerton told ContractorUK.

‘BADR retention is good news’

Directors of limited companies should also be relieved that BADR isn’t being interfered with now, unlike CGT rates which are (the lower rate will increase from 10% to 18%, and the higher rate from 20% to 24%).

Chartered accountant Helen Christopher of Beansprout Consultancy fleshed out her assessment: “It was good news that BADR is to be retained and somewhat surprising that the rate of tax is not being increased until April 6th 2025, given other Capital Gains tax rate increases came in today.”

‘Less generous BADR is highly questionable’

IPSE policy director Andy Chamberlain wouldn’t quite call pinching the potential tax relief when exiting a company good news, however.

“BADR isn’t being scrapped, as had been speculated, but it will get less generous,” he clarified to ConractorUK.

“Reducing the relief penalises entrepreneurs yet it nets relatively little for the Exchequer. It’s a highly questionable move from a government that has prioritised economic growth.”

‘Autumn Budget 2024 changes the shape of the umbrella market’

Yet rather than its small, staggered tax changes, Autumn Budget 2024 will be remembered, if not for its £25billion hike in Employer NI, for its timetabled, legislated move against umbrellas, says Professional Passport.

Chief executive Crawford Temple says: “Chancellor [Reeves] intends to tackle non-compliance in the umbrella company market… [and] this move will certainly change the shape of the market.

“It will also present a number of challenges to agencies [while at the same time it] will ramp up the need for robust enforcement measures in the run-up to April 6th 2026. 

“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 [by HMRC] 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.”

Editor’s Note: Further analysis of Autumn Budget 2024, featuring insights from SG Contractor Accounting, SG Umbrella, Yolo Wealth, SFP Group and Freelancer Financials, will be published tomorrow morning, exclusively on ContractorUK,