Reeves lifts employer NIC to 15% and shifts umbrella PAYE liability onto agencies

The Autumn Budget squeezed umbrella workers' take-home pay while redrawing who carries the tax risk in the contractor supply chain.

Delivering Labour's first Budget on 30 October 2024, Chancellor Rachel Reeves confirmed a rise in employers' National Insurance and a shake-up of how umbrella companies are taxed, two measures that landed directly on the pay of Britain's IT contractors. From 6 April 2025 the main rate of secondary Class 1 National Insurance rose from 13.8% to 15%, while the threshold at which employers begin paying was cut from £9,100 to £5,000. For the many technology contractors engaged through umbrella companies, that increase feeds straight into the assignment rate rather than the client's margin.

A tax on jobs, passed down the chain

The Treasury expected the National Insurance package to raise around £25 billion a year, the single largest revenue measure in the Budget. To cushion the smallest firms, Reeves more than doubled the Employment Allowance from £5,000 to £10,500 and removed the £100,000 eligibility cap, though single-director personal service companies remained excluded.

For umbrella workers the mechanics were unforgiving. Because an umbrella company is the legal employer, the higher employer NIC is met from the assignment rate before a contractor's own PAYE and pension are deducted. Myron Jobson, senior personal finance analyst at interactive investor, said: 'In most cases, the umbrella company employs a freelancer/contractor and pays their wages through PAYE. As such, the increase in NI for employers threatens to reduce the take-home pay for hundreds of thousands of freelancers.' Seb Maley, chief executive of contractor tax firm Qdos, added that it seemed unlikely end clients would lift gross fees to absorb the rise, meaning the costs 'may well be passed down to umbrella workers.'

PAYE liability to move onto agencies

The Budget also set out the Government's long-trailed response to non-compliance in the umbrella sector. From April 2026, responsibility for accounting for PAYE and National Insurance where an umbrella company is used will move from the umbrella to the recruitment agency that supplies the worker, or to the end client where no agency sits in the chain. HMRC estimated that around 700,000 workers were engaged through umbrella companies in a single year, and that at least 275,000 of them had been employed at some point by a non-compliant provider. The measure was forecast to raise about £2.8 billion.

Lucy Smith, managing director of Clarity Umbrella, welcomed the scrutiny but warned of teething problems. 'It makes a refreshing change to see umbrella companies finally mentioned in the Chancellor's speech, however the latest guidance released seems to have caused confusion across the industry,' she said.

What it meant for contractors

For contractors the combined effect was a squeeze on net pay from April 2025 and, a year later, a redrawing of who carried the tax risk in their supply chain. Agencies and end clients facing fresh liability were expected to tighten their approved umbrella lists, favouring larger, audited providers over smaller operators. Those still trading through a personal service company faced a separate blow: capital gains tax on Business Asset Disposal Relief rose from 10% to 14% in April 2025 and to 18% from April 2026, raising the cost of closing a company down. Maley argued regulation still had further to run, calling the reform 'not the end game' and saying the industry 'needs regulation, which would help flush out non-compliant operators.'

For an IT contracting workforce already reshaped by the off-payroll rules, the Budget confirmed that the umbrella model would carry both higher costs and closer scrutiny for years to come.