How will the budget affect UK contractors?

The much-anticipated first budget of the new Labour government was full of measures to fill what the chancellor described as a ‘£22billion black hole’ in the nation’s finances, including measures that directly affect UK contractors.

These included:

1. New umbrella company regulations
2. Employer NICs increased for umbrella company contractors
3. Employer NICs increased for limited company directors
4. BADR and CGT rates to increase in April 2025 and April 2026

Let’s take a closer look at each one.

New umbrella company regulations

The biggest change for contractors announced in the autumn budget was in relation to umbrella company regulation.

From April 2026, PAYE responsibility will shift from umbrella companies to recruitment agencies, while the end-client will be responsible if there’s no agency involved. The aim of the new legislation is to place the responsibility of paying the correct amount of PAYE on the labour supply chain, rather than the contractor. The umbrella company can still run the PAYE, but it’s the end-client or agency that will be liable if they default.

Employer NICs increased for umbrella company contractors

Contractors working via an umbrella company will be directly impacted by the increase in Employer National Insurance contributions.

From 6th April next year, ERNICSs will rise 1.2%, from 13.8% to 15%, but contractors will also be impacted by the reduction in the secondary NI threshold from £9,100 to £5,000. This is because employment costs are deducted from their agreed assignment rate, meaning contractors will be left with less gross income unless they’re able to agree an uplift in their assignment rate.

Employer NICs increased for limited company directors

Employer NICs are also increasing for limited company directors, and there are three key implications of this for contractors operating as limited companies:

1. Employers will face higher expenses, potentially leading to tighter budgets and reduced spending elsewhere in the business.
2. There’ll be an increased demand for highly skilled contractors because, unlike with employees, there’s no ongoing salary commitment, no employer pension contributions and no employer NI to pay. This could make hiring contractors much more appealing to businesses.
3. There could be pressure on contractors to lower their rates to offset the NI increase—even though ERNICs aren’t payable when hiring contractors. Businesses might try to claw some of those extra costs back from contractors.

BADR and CGT rates to increase in April 2025 and April 2026

Business Asset Disposal Relief (BADR)—available on disposals of business assets, reducing the rate of Capital Gains Tax on qualifying gains—is increasing from 10% to 14% in April 2025, and to 18% in April 2026.

The relief is available to individuals disposing of their personal businesses or interests in a partnership, including the sale of shares in the company they work for.

This increase was lower than some experts predicted before the budget, but contractors should still consider taking advantage of the window they have before the rate increases on 6th April.

How we can help

If you’re a contractor there’s a whole range of legislation that impacts you, regardless of whether you operate as a sole trader, limited company or via an umbrella company.

By employing the services of experienced accountants, like the contractor specialists here at Warr & Co, you can rest assured that all of your tax affairs are taken care of and focus on what you do best: delivering quality services to your clients.

To find out more about how we can help book a free contractor accounting consultation, or get in touch with the team today.