Autumn Budget 2024 – the impact on umbrella contractors and the umbrella industry

Official estimates put the annual take-home dent at £800, industry estimates at £1,000. Either way, the chancellor giveth to HMT but taketh from the umbrella market — and in more ways than one.

The Employer NICs increase to 15% for 2025-2026, plus the £4,100 decrease to the secondary threshold, will severely bite umbrella company contractors’ take-home pay, writes former tax inspector Carolyn Walsh, a director at Oblako Ltd.

Such a ‘taketh’ away from the chancellor very much ‘giveth’ to the Treasury, as these two moves by Rachel Reeves at Autumn Budget raise £11.8billion and £17.7billion, respectively.

What is static yield?

Both figures are “static yield,” in OBR-speak — the extra revenue incoming to HMT (annually) before taxpayer behaviours are factored in.

But could you argue that Rachel Reeves kept to her party’s promise that employees will see no increases in taxes on their payslips next tax year?

Only if your assignment rate rises will Rachel have kept her word

The rub is this — if the assignment rates paid by agencies to umbrella companies are NOT uplifted in 2025, umbrella company employees will see their gross pay automatically go down by a few unwelcome per cent when 2025-26 starts on April 6th 2025.

Estimates on social media, taking the example of a £600 day rate, indicate that for umbrella company employees, this few per cent shaving equates to £200 a week. So that’s approximately £1,000 a year, off of your take-home and into HMRC’s pocket.

OBR: Employer NICs rise to cost £800+ per employee

Estimates from the Office of Budget Responsibility indicate that, once lumped in with the welcome, fatter Employment Allowance, the average annual tax increase “per employee” is “in excess of £800”.

It’s not got great optics for a Budget that was long-trailed, long-promised,  and long-insisted to not increase taxes on people who work for a living.

Higher employer NICs to hit 940,000 employers

For full context, the OBR also says 250,000 employers will gain from the three-fold National Insurance package, while 940,000 employers won’t and so will lose out, and 820,000 employers will see no change in their HMRC liabilities.

Yet the inescapable point for many brolly contractors will be that, without an uplift to their assignment rate, Reeves hasn’t kept to her boss Sir Keir Starmer’s word to not put up tax on “working people.”

‘I know Employer NICs impact will go beyond biz’

Due to the groans and guffaws it was somewhat difficult to hear in her House of Commons speech, but Reeves herself hinted she knows that in the OBR’s words, “60 per cent of the higher [National Insurance] costs” in 2025-26 will be passed on to “workers”, when she said:

“We are asking business to contribute more. And I know that there will be impacts of this measure felt beyond businesses, too.”

With the latter ‘beyond businesses’ bit,  Reeves could have been referring to workers in umbrella companies.

Or she could have been referring to the anticipated spike in both tax-motivated incorporations and mini-umbrella companies.

OBR: Higher ERNICs will trigger more MUCs and 17,000 TMIs

Don’t take just my word for it; it’s the OBR who are warning:

“A direct behavioural response to the measure [of higher employer NICs]…is primarily that it increases the incentive for more tax-motivated incorporations (TMIs), together with non-compliance through increased incentives to form mini umbrella companies.

“We estimate TMIs will increase by a cumulative 17,000 by 2029-30 as a result of the measure. These combined effects reduce the [£26.4billion static] yield [of the measure] by £0.7 billion by 2029-30.”

Thinking of umbrella contracting from April 6th 2026?

However, there’s a big twist before you get to 2029-30.

In particular, from April 6th 2026 — the tax year 2026/27, Autumn Budget says the government will make recruitment agencies legally responsible for deducting PAYE on payments to contractors employed via umbrella companies.

The rationale for the government moving against umbrella companies is clear and well-established, but it’s broadly being done to cut PAYE fraud.

The use-case for umbrellas is going to be severely dented in 2026-27

It’s likely that making agencies the deemed PAYE employer of umbrella contractors will drastically reduce the use-case for brollies, potentially leading to a universal reduction in their engagement.

Keep in mind, currently, agencies use umbrella companies to cut administrative costs as much as avoiding employer costs and responsibilities.

But rather than paying one invoice to one umbrella company which may cover hundreds of contractors, from April 6th 2026, agencies will have to process each PAYE payment separately, and then pay each worker’s net pay to the umbrella company — which will then have to forward the payment on to workers.

Could YOU be bothered with it all?! No, me neither…

What a faff. And what a waste of time and staff costs for agencies.

Also keep in mind that at present, umbrella companies deduct their fee from the assignment rate before basic pay is calculated. But from April 6th 2026, the margin will have to be deducted from workers’ net pay — and such a deduction could breach the rules on unlawful deductions from wages too, unless every contractor agrees in writing to pay the umbrella company fees from their net pay.

Recruiters have been here before

More likely, agencies will just step back from using umbrella companies altogether, much like they stopped paying limited company contractors when the IR35 rules changed a few years back, when agencies were required to deduct PAYE at source — in the same way as the incoming requirement.

The administration of such a process was not seen to be viable back then, especially when umbrella companies provided an alternative solution.

Potentially why the OBR forecasts 17,000 tax-motivated company set-ups

But there are arguably no alternatives to umbrella companies (at least not compliant ones), other than requiring agency workers to set up limited companies. And maybe that explains the estimated 17,000 new tax-motivated incorporations which the OBR is forecasting.

To be compliant, any agency worker looking beyond their brolly will not just likely incorporate, but will also need to get their income paid via a managed service company provider which deducts PAYE at the correct level. Only that course of action won’t breach MSC legislation, the Agency legislation and the IR35 legislation.

Those with regulation-fatigue won’t want LTD

Whether workers, wearied by all the changes and maybe being a bit savvier nowadays, will agree to take on the responsibility of a limited company is another matter.

After all, a worker who was umbrella contracting will, as a PSC director, become responsible for filing both company and possibly VAT returns, at a time when their take-home pay is still around the same level as an employed worker.

And that’s a worker who doesn’t have to pay an MSC provider, or accountancy fees, or risk HMRC penalties if they’re left to deal with all their director responsibilities when they leave a provider.

Back to PSCs they go…

Perhaps the only silver lining for these workers is that some of them may have run a Personal Service Company before.

Indeed, the possible flow of umbrella-to-PSC workers in 2025-26 will invariably include some individuals who were in the flow of PSC-to-umbrella workers sent packing by the IR35 reforms of April 6th 2017 and 2021.

Impact assessment of employer NICs rise on UK contracting

In summary, agency contractors will need to sit down with a calculator, or just ask their umbrella company, to calculate a new assignment rate. It needs to be a rate which provides them as a contractor with pay parity in 2025/26, thereby negating the higher employer NICs and lower secondary threshold.

And then these contractors must invariably ready themselves for another change in the subsequent tax year — working inside IR35 or under the direct employment of agencies or end-clients.

Unless of course umbrellas can work diligently, quickly and compliantly with their agency colleagues and other supply chain partners in the next 18 months to turn around this extremely unfavourable hand that has been dealt to them by the chancellor.