Minutes to read 5
On October 30, 2024, Chancellor Rachel Reeves presented the first Labour government budget in 14 years, putting an end to weeks of speculation about potential tax hikes and budget cuts.
While no clear winners emerged from the 2024 budget, the announcements were not as catastrophic as some had feared. However, questions remain about the budget’s impact on various sectors of the UK economy.
In this article, we’ll explore how the key announcements affect contractors.
National Insurance Changes
One of the most significant changes from the 2024 budget is the change to national insurance (NI). Aimed primarily at businesses, these changes will have broader implications for the UK economy, as increased costs may ultimately be passed on to consumers and umbrella workers fall into the firing line.
The budget introduces a 1.2% increase in employers’ national insurance contributions, raising the total to 15%. Additionally, the secondary threshold—the point at which employers must start paying national insurance—will decrease from £9,100 to £5,000. These alterations effectively raise the cost of hiring staff.
The employment allowance, which allows businesses to offset the cost of employer national insurance against their PAYE liabilities, is set to increase from £5,000 to £10,500 starting April 2025. Notably, the previous eligibility cap of £100,000 in employer NI contributions will be eliminated, although restrictions remain for limited companies with a sole employee who is also a director.
Furthermore, the lower earnings limit will rise by £2 per week to £6,500 annually, while the small profits threshold will increase to £6,845.
The Impact on Umbrella Companies
While there may be no outright winners in the Chancellor’s statement, umbrella companies face notable challenges. Although the NI changes target businesses, the effects will be felt by umbrella workers, who will see the increased secondary contributions deducted from their pay. The increase in rates, coupled with the decrease in the secondary threshold, positions umbrella workers as significant losers from these announcements.
Additionally, the government plans to intensify compliance measures in the umbrella company sector, placing responsibility for PAYE payments on recruitment agencies that supply workers via umbrella companies. If no agency is involved, the end client business will bear the responsibility.
Given the proposed changes in the umbrella market, and the increased cost of hiring an employee due to the national insurance measures, businesses hiring its contractors via umbrella companies will have a choice to make from April 2025.
Limited Companies
Contractors operating through limited companies may experience a mix of benefits and drawbacks from the national insurance adjustments, depending on their specific circumstances. For sole director-employees with a salary of £12,570, the increase in employer NICs will amount to an additional £656.64.
However, the expanded employment allowance may allow more companies to claim relief. Businesses with a second employee (or a non-director employee) earning above the new secondary threshold will now qualify. Businesses with employees below the £9,100 current threshold, with a director above it, will be able to offset employers’ NI which previously it would not have been able to benefit from.
As the secondary threshold now falls below the lower earnings limit, those previously aligning their salary with the secondary threshold (primarily to avoid employer national insurance contributions) must reassess the impact on their eligibility for state benefits, including their qualifying year for the state pension. Simply put, even if this remains the most tax efficient option – it may not be the most sensible option overall.
With these national insurance changes, along with the changes to corporation tax in recent years, limited company contractors will need to carefully consider the most tax-efficient strategies for setting director salaries.
As the cost of hiring employees rises (up to 19.5% for a higher rate tax payer), and the changes outlined in the umbrella market take effect, engaging contractors through their own limited companies may become a more appealing option for businesses.
Self-Employment Considerations
Given the changes to those operating through umbrella, the potential increased costs to those contracting via their own limited company, and the recent increases to corporation tax and reductions in class 2 & class 4 national insurance – the disparity in tax efficiency between limited companies and self-employment continues to narrow, and the ease of use of umbrella for businesses appears as though it will become less attractive.
The advantages of self-employment have only increased over the past few tax years, however, obstacles still remain, including the threat of personal liability, securing contracts as self-employed individuals, and the impending changes associated with Making Tax Digital (more on this to come in a separate blog). Despite these obstacles, and the upsides that a limited company brings with increased flexibility and limited liability, the announcements within this budget will have left those operating as a sole trader breathe a sigh of relief.
Capital Gains Tax Updates
Changes to capital gains tax (CGT) were largely anticipated, though the adjustments to the main rates may impact limited company contractors financially when the wider picture is considered.
The main CGT rate will rise from 10% and 20% for basic and higher-rate taxpayers, respectively, to 18% and 24%. Unexpectedly, these rate increases are effective immediately as of October 31, 2024, rather than from April 2025.
For limited company contractors contemplating closure, this sudden tax increase presents a significant, unexpected hurdle unless they qualify for business asset disposal relief (BADR). While BADR will eventually rise in line with the basic CGT rate, it will do so incrementally – remaining at 10% for the remainder of the 2024/25 tax year, increasing to 14% in 2025/26, and then 18% in 2026/27, with the £1 million lifetime limit being maintained.
Contractors considering closing their limited companies must evaluate their immediate financial situations and whether they can benefit from BADR. Given the limited time remaining in the current tax year, businesses with over £25,000 in capital for distribution should be mindful that appointing a liquidator for members’ voluntary liquidation (MVL) can be a lengthy process, with increased demand likely following the budget announcement.
It is worth noting, given the speculation surrounding CGT ahead of the budget, that the percentage increase in capital gains was lower than initial speculated and that the £3,000 capital gains tax free allowance remains in place.
While the rise in capital gains tax will affect contractors, it is not the drastic measure many anticipated and primarily impacts those planning to cease trading.
Summary
Despite the insistence that the 2024 budget was not a tax hike on working people, the impact of the measures implemented will likely hit everybody, including contractors, in the pocket – whether directly or indirectly. However, based on some of the expectations prior to the announcement – some contractors will breathe a sigh of relief, with dividend tax rates and tax free allowances remaining at their 2023/24 rates.
The budget presents a more complex landscape for contractors, with significant implications primarily from changes to employers national insurance, capital gains tax and the crackdown on compliance in the umbrella sector. Whilst some contractors may find opportunities, others, particularly those in the umbrella sector will face increased tax burdens.
Careful consideration will be essential in determining the most tax efficient and most appropriate strategies moving forward. Long gone are the days of a simply operating through a limited company on a “one size fits all” salary recommendation, staying informed on the changes and liaising on their specific situation with an accountant or tax advisor will help contractors adapt and make informed decisions in the changing financial landscape.
If you have any queries about how the Autumn Budget might affect your business or our contractor accounting service please request a call back to speak to an accountant.
