Umbrella contractors bear the 15% employer NIC rise as the new tax year begins
The 2025-26 tax year opened with a dearer minimum wage and a steeper National Insurance bill, and for umbrella-employed IT contractors the two collided in a smaller pay packet.
On 6 April 2025 the main rate of employer National Insurance contributions rose from 13.8% to 15%, and the point at which employers begin paying it, the secondary threshold, fell from £9,100 to £5,000 a year. Coming days after a 6.7% rise in the National Living Wage on 1 April, the change reshaped the economics of the umbrella-company payroll that carries a large share of the UK's IT contractors, and for many it meant less money in hand.
A higher rate on a lower threshold
The measures were announced by Chancellor Rachel Reeves in the Autumn Budget on 30 October 2024 and set out in the National Insurance Contributions (Secondary Class 1 Contributions) Act. The secondary threshold was not merely cut but frozen at £5,000 until April 2031. To shield the smallest employers, the Employment Allowance was raised from £5,000 to £10,500 and its £100,000 eligibility cap removed.
The Treasury estimated the package would raise around £23.8 billion in 2025-26. The Office for Budget Responsibility judged that employers would not absorb the cost alone, forecasting that about 60% would be passed to workers and consumers through lower real wages and higher prices in the first year, rising to roughly 76% thereafter. Business groups had condemned the change as a tax on jobs.
The wage floor moved too
From 1 April the National Living Wage for those aged 21 and over rose from £11.44 to £12.21 an hour, a 6.7% increase. The 18-to-20 rate jumped 16.3%, from £8.60 to £10.00, while the rate for 16- and 17-year-olds and apprentices reached £7.55. The government, accepting the Low Pay Commission's recommendations, said the increases would benefit more than three million workers and were worth around £1,400 a year to an eligible full-time worker. Deputy Prime Minister Angela Rayner called it "a proper wage increase worth over twice the rate of inflation".
What it meant for contractors
The squeeze fell hardest on umbrella employees, whose employer National Insurance is met from the assignment rate paid by the agency rather than borne by the umbrella as an extra cost. Unless the end-client lifted that rate, the higher NICs came straight out of the worker's pay. Matt Fryer, managing director of Brookson Group, calculated that, with no uplift, a contractor on £20 an hour would lose about £11 a week, one on £40 an hour about £13, and one on £70 an hour about £17.
Ciaran Woodcock, commercial director at SG Umbrella, noted that on an average £37,000 salary the annual employer NIC bill rose by roughly £950, set against umbrella margins that typically run at £15 to £25 a week. With an estimated 700,000 people working through umbrellas, the aggregate drag was considerable.
Chris Bryce, chief executive of the Freelancer and Contractor Services Association, had warned before the Budget that, however it was presented, the rise "absolutely would be a tax increase for working people". The FCSA urged its members to press clients and agencies to lift assignment rates so the extra cost did not land on the contractor.
Whether those higher rates would materialise, in a contracting market already thinned by IR35, was the question the new tax year left open.