The new calendar year brings with it the countdown to the end of the financial year and any new measures being introduced on the other side of this.
As any employer or worker will know, from 6 April 2025, the employer National Insurance contributions (NIC) rate is due to increate from 13.8% to 15%. Crucially, this will come hand-in-hand with a lowering of the threshold after which employers must pay these NICs from £9,100 a year to £5,000 per year. This measure will make it more expensive for businesses to employ staff.
For firms hiring a significant number of lower paid workers, a 6.7% increase in the National Minimum Wage (for those aged 21 and over), effective from 1 April 2025, will also bring added costs and complications.
What does this mean for umbrella companies?
As businesses across all sectors grapple with the impact that NIC changes will have on the bottom line and their approach to hiring, what risks do umbrella companies face as employers of around 700,000 workers in the UK?
One advantage is that in the assignment-based workforce many contracts only last a matter of days or weeks, such as one-off project work or supply teachers or contract nurses filling unexpected gaps due to sickness. Therefore, whilst the threshold has lowered to £5,000, a multitude of shorter contracts may not go above this threshold. With each new contract, the threshold will reset.
When the increased tax rate does kick in, the cost of this will not be shouldered by the umbrella company but passed straight on to the worker, resulting in reduced take-home pay. This will have a significant impact on workers.
Furthermore, umbrella companies face another hurdle. If firms cover the cost of NICs directly out of payslips and reduce their workers' take-home pay, umbrellas will need to be careful not to dip below National Minimum Wage, which is simultaneously going up. As employers, umbrella companies are responsible for ensuring that they do not breach National Minimum Wage rules by paying workers beneath this minimum level once all deductions have been made. If this does occur, as well as negatively impacting the workers, the umbrella companies would risk financial penalties and public action from HMRC.
In the months before 6 April, umbrella companies and employment agencies will need to collaborate to review and adjust rates to ensure that they remain compliant with the law for the sake of the workers and their firm's reputation. How this is handled by umbrella companies may have a lasting impact in light of upcoming legislation of the umbrella company sector in April 2026. As this legislation will make employment agencies legally responsible for all correct tax deductions in the payroll process, there is likely to be a tightening of the umbrella company supply chain with agencies being increasingly selective over which firms they work with.
What does this mean for the contract market?
The rise in cost to hire permanent employees, coupled with an Employment Rights Bill in the pipeline that will give individuals more rights from day one of employment, may lead more businesses and their HR departments to consider hiring contractors wherever it is feasible to do so. With this backdrop, 2025 may yet prove to be a robust year for the UK's assignment-based workforce.