A tax expert tots up how much extra limited company contractors (and fee-payers) must fork out thanks to the chancellor’s ERNI changes.
Last month’s Autumn Budget certainly made an impact, perhaps nowhere more so than in the umbrella company space.
But the chancellor’s April 6th 2025 hike in employer National Insurance Contributions will hit limited company contractors engaged in IR35 deemed employment too, writes Alex Seal of Markel Tax.
Good questions (if I do say so myself!) about inside IR35 and higher employer NICs
By how much, and anyway what do I mean by ‘IR35 deemed employment’?
Good questions! Let me tackle the last of those two first.
For limited company contractors responsible for their own IR35 status, if they are operating within IR35 — i.e. caught by the legislation or inside IR35, then HMRC says the “deemed payment” would need to be calculated.
The actual amount of deemed payment will differ considerably from contractor to contractor depending on individual circumstances.
Deemed Payment: simple example
But to keep it simple, let’s use an example of:
- £100,000 fee;
- salary of £30,000;
- allowable expenses of £1,000, and finally;
- pension contributions of £4,000
Based on this example, which I acknowledge uses standard rates and very basic assumptions, a rough estimation using the current rate of employer’s National Insurance (ERNI), would return an ERNI liability to HMRC of £7,882.
Under the April 6th 2025 measures, however, utilising the same basic amounts, the liability would increase to roughly £8,437.
An almost £2,000 sting…
Therefore (and to answer my own ‘how much’ question at the top), an inside IR35 limited company contractor would see an increase of roughly £555.50 in additional ERNI. And an overall loss of £1,421 in the deemed employment payment.
The sting here is largely because the rise in ERNI percentage also comes with a reduction in the secondary threshold (from £9,100 to £5,000), meaning an additional £4,100 is subject to ERNI.
But the employer National Insurance fallout from the Autumn Budget is not just confined to limited company assignments where ‘old’ IR35 applies!
The new IR35 and higher ERNI from April 6th 2025 for fee-payers
For ‘fee-payers’ within Chapter 10 ITEPA 2003, where an engagement has been deemed within IR35, it will see an increase in HMRC liability of over £1,000.
Using the same figures as above; to determine the deemed direct payment, the fee-payer’s current liability to the Revenue would be roughly, £13,662.
Under the April 6th 2025 changes, the tax bill would increase to £14,850, representing a significant addition of £1,188.
As we know from the Chapter 10 legislation, this amount payable by the ‘fee-payer’ is not allowed to be deducted from the deemed direct payment.
How an HMRC liability of £1,188 can become approx. £11,000
On its own, you might think it’s not too steep an increase for fee-payers to absorb, but remember that my calculation is for only one ‘inside IR35’ Personal Service Company contractor.
Take 10 PSCs, each determined to be inside IR35, and the annual increase in HMRC liability due to the Autumn Budget’s ERNI changes is in the region of £11,000!
With margins already being squeezed, it is unlikely that many ‘fee-payers’ (typically contractor recruitment agencies) will easily accommodate this hefty increase.
But doesn’t the Employment Allowance increase help?
For full context, the chancellor did announce on October 30th 2024 that to lessen the blow of the increase in ERNI, the Employment Allowance would increase from £5,000 to £10,500.
However, the Employment Allowance can only be claimed if certain criteria are met.
For limited company/ PSC contractors, HMRC guidance confirms:
“You also cannot claim if your company has just one director and that director is the only employee liable for secondary Class 1 National Insurance”.
For fee-payers, the same HMRC guidance states:
“Certain employees cannot be included in your claim, such as someone whose earnings are within IR35 ‘off-payroll working rules’”
HMRC guidance confirms the Employment Allowance is off-limits to most limited company contractors
The effect of these two HMRC guidance snippets? Unfortunately, it is that the majority of PSCs will be unable to make use of the greater Employment Allowance.
Only if you — the limited company consultant — have a more sophisticated set-up — i.e. more than just the fee-earning director receiving salary, is there potential to benefit from the greater EA. And even then, remember, fee-payers are unable to utilise the allowance for inside IR35 engagements.
Proceed with care
The IR35 liability shift under Chapter 10 for medium-sized and large businesses created uncertainty and over-cautiousness in the IT and tech contractor market.
We saw many businesses implement a “blanket ban” on engaging ‘IR35 contractors’, not wanting to expose their organisation to IR35 liabilities, which pushed a lot of contractors into umbrella companies.
Today, with 2025 just a month or so away, we are seeing a return to engaging PSC contractors (albeit slowly).
But there is a new risk that with increased potential liabilities, there may be a rise in overly cautious Status Determination Statements and a further push towards umbrella companies.
Back to the negotiating table
Frustratingly for them, many contractors have already had to attempt to negotiate a higher rate with their end-clients to ‘make up’ the shortfall of operating inside IR35. Yet this shortfall is now set to increase, and most contractors simply can’t tolerate taking the hit.
For inside IR35 engagements, where there will be an increase in the money needed to pay HMRC, there is simply no way of avoiding this. The reality is this — the money can only come from further up the supply chain — contractors, fee-payers and umbrella companies cannot fund it themselves.
Practical steps – and a warning
With only roughly five months to go until the proposed changes to employer’s National Insurance come into play, it would be wise for engagers and fee-payers to make sure their house is in order, by getting contracts reviewed; by ensuring working practices still align with contractual documents and insisting that “reasonable care” is always taken when engaging with contractors.
Be under no illusion! There is no doubt (in our advisory’s mind) that employer national insurance changing will have a greatly adverse impact on the contractor market, as it will see a significant and costly increase in both potential liabilities and costs.
Final thought
Lastly, engagers and fee-payers ought to keep in mind — the costs of getting an outside IR35 determination wrong have increased, yes; but the cost of operating inside IR35 is becoming increasingly higher. It is possible to operate outside of IR35; it simply takes proper consideration, open dialogue and attention to both contracts and ways of working.
