Guidance from a top assessor of payment compliance on how contractors can navigate the soon-to-be legislated against umbrella company landscape.
‘Opinions are like noses — everyone’s got one,’ or so the cleaned-up version of the adage informs us. And that’s especially true about something as divisive as both Autumn Budget 2024 and umbrella companies.
So I want to take a dispassionate look at the chancellor’s announcements affecting the umbrella market, to serve as a sort of reference point as to what was announced on October 30th and in broad terms, how contract workers stand to be affected.
For extra ease of reference, I will focus on three key areas of the budget that will significantly impact umbrella contractors, writes Crawford Temple, CEO of the UK’s largest independent assessor of payment intermediary compliance, Professional Passport.
1. Hike in employer National Insurance Contributions
One of the most significant announcements in the Budget was the hike in employer National Insurance Contributions (NICs), to 15% from April 6th 2025.
Contractors working through umbrella companies will acutely feel the increase in employment costs.
This is due to the fundamental structure of umbrella company payments, where the monies received include all employer costs. As these costs increase, there will inevitably be less money available for workers, resulting in a direct reduction in their take-home pay.
Limited company working, soon to be back in vogue?
The reduction in take-home pay for umbrella company contractors could incentivise some end-clients to reconsider their working arrangements, potentially creating opportunities for contractors to operate through their own limited companies again.
However, I would issue a note of caution to contractors about the risks associated with this shift.
Managed Service Company legislation alert
In particular, I would urge contractors to familiarise themselves with the Managed Service Company (MSC) legislation, and then be cautious in their selection of service providers or accountants.
If HMRC deemed the service offered to fall within the scope of the MSC legislation, this would result in the income received by the MSC predominantly being treated as PAYE earnings, which would then remove all the benefits of such a move to ‘LTD.’
And the worker would be back to square one!
There are currently a few court cases pending on this issue, so contractors should heed the warning.
2. Salary sacrifice contributions to pensions
For those contractors who continue to work through umbrella companies, salary sacrifice contributions to pensions may become an even more attractive option, thanks to Autumn Budget 2024.
Since these contributions are taken out before employment costs are applied, they can now provide significant savings and value for money, as they completely avoid the incoming, increased cost of employer NICs.
Salary sacrifice isn’t universal among umbrellas
Contractors should consult with their umbrella providers to explore this option.
Why? Well, not all providers offer salary sacrifice, and some may apply additional charges for the administration.
3. Potential liability for recruitment companies
From April 5th 2026, recruitment companies will become liable for the correct application of PAYE where their workers operate through an umbrella company, according to Autumn Budget 2024 chapter 5.26.
While the details are still emerging, this change is likely to lead to a tightening of the Preferred Supplier Lists (PSLs) operated by recruitment companies, resulting in less freedom of choice for umbrella contractors.
Recruiters will no longer stray outside their Preferred Supplier List
Agencies will no longer operate outside of their PSLs for fear they could face significant tax liabilities, should an umbrella fail to operate PAYE correctly.
The legislative changes are also likely to see more scrutiny around the treatment of expenses, as these too could result in HMRC liabilities being passed back to the agencies.
Indemnities won’t likely cut it
While the government has hinted at the use of indemnities in the Autumn Budget document ‘Tackling Non-Compliance in the Umbrella Company Marke,’ we believe that indemnities are unlikely to offer any real security to the agency or end-client.
Our reasoning is that the potential levels of debt that could arise may simply be too significant.
Umbrella market is a-changin’
So change is finally set to come to the umbrella market. But the devil, as always, will be in the significantly more details that need to be outlined and then ironed out to make the government’s legislative intent work, in practice. We therefore watch this space keenly. Safe to say; contractors should do the same — staying informed and being proactive in adapting to these changes while working only with reputable firms.
Recommended Contractor Accountants
- SG Accounting - Join SG and get first 3 months @ £54.50pm
- Clever Accounts - IR35 FLEX. Take on any contract you're offered
- Aardvark Accounting - Complete service just £76/month
- Integro Accounting - 6 months fixed fee accountancy service half price!
Open a Which? Recommended ii SIPP - pay no account fee for your first 6 months
