Tax experts warn over national insurance rise for employers

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An increase in employer’s national insurance would have far-reaching consequences for freelancers, small business owners and some of the country’s most vulnerable workers, tax experts have warned.

Prime minister Sir Keir Starmer this week refused to rule out an increase in employer national insurance contributions — a tax that could raise billions of pounds towards the country’s coffers at the October 30 Budget.

Employer’s NI is currently charged at 13.8 per cent on all employees’ earnings above £175 per week. The main options are raising NI on earnings, or NI introduced on employers’ pension contributions.

“If the cost of hiring rises, businesses will need somehow to shoulder this. It goes without saying that the smallest businesses will be hit the hardest,” said Seb Maley, chief executive of tax adviser Qdos.

“For small owner-managed businesses a rate rise could be crippling,” added Rebecca Seeley Harris, founder of ReLegal Consulting. As a result, many would either choose not to hire anyone or consider using freelance workers.

“The problem is that engaging someone off-payroll these days is fraught with difficulty and uncertainty,” she said.

For instance, changes in recent years to the off-payroll working tax rules, known as IR35, have created a complicated landscape for businesses and freelance workers.

One result has been a rise in the number of contract or temporary workers using so-called umbrella companies.

These are payroll agencies that take on a contractor’s financial administration, managing their tax and pay. But the umbrella industry is unregulated and while there are many legitimate operators, industry experts warn there are also many scams.

Chris Bryce, chief executive of the Freelancer & Contractor Services Association, said an employer NI rate rise would have “an effect on all working people but has particularly far-reaching and, frankly, deeply concerning” implications for umbrella workers — leading to reductions in take-home pay.

In some cases, it could “push some umbrella workers’ gross pay dangerously close to — or even below — the national minimum wage”, he said, adding this would also create compliance issues for employers and will need to be addressed by recruitment agencies and their clients.

Crawford Temple, chief executive of Professional Passport, an independent assessor of payment intermediary compliance, said: “A proposed rise in employers’ NICs will penalise workers in umbrellas as the monies received by the umbrella firms include all the employers’ costs. The higher the costs the less money there is for workers — so they will see a drop in their take-home pay.”

Higher costs would make it harder for legitimate umbrella operators, who work on very narrow margins, Temple added, and this environment would “provide an even greater incentive for non-compliant providers to gain a stronger foothold in the market”.

“Umbrella company workers are working people but, have so far been afforded no protection from the Labour government,” said Seeley Harris. Such workers were “particularly vulnerable”, she added.

However, other commentators said that while there were some risks for certain types of freelancers, an increase in employers’ NI could have positive effects for other self-employed people.

Maley said that IR35 changes to the private sector implemented in 2021 had resulted in some businesses taking a blanket approach by adding their contingent workforce to the payroll. Increased employers’ NI could “force businesses facing higher costs to rethink this approach and potentially open the door for more opportunities for freelancers and contractors,” he said.

Dave Chaplin, chief executive and founder of contracting authority ContractorCalculator, predicted the potential in employers’ NI would “see more firms hiring contractors”.

He said: “While contractor day rates may appear higher than equivalent permanent staff costs, the long-term savings [for employers] are significant — there’s no ongoing salary commitment once a project ends, no pension contributions, and crucially, no employers’ NI to worry about.

“It’s a win-win situation,” he said. “Businesses gain flexibility and cost control by hiring talent on tap on an as needs basis, while contractors typically earning higher rates contribute more to the Treasury through their tax payments.”