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The incomes of as many as 800,000 freelancers could be hit if the government decides to increase employers’ national insurance contributions tomorrow.
Chancellor Rachel Reeves is said to be considering the move as part of her plans to raise money to save Britain’s battered public services.
Employers pay the tax at a rate of 13.8 per cent on income above £9,100 per year. Labor has claimed the budget will not hit working people, but tax experts say some freelancers could end up footing the bill.
Those who work for so-called umbrella companies could lose out, says Rebecca Seeley Harris, employment status expert and founder of ReLegal Consulting.
Umbrella companies employ contractors for temporary work, often paid through recruitment agencies.
But employees who use them may find that they receive a flat rate, including all taxes. This means that if employers’ national insurance contributions increase, it will affect their take-home pay, she said.
An employer currently pays £2,884.20 into National Insurance for an employee earning £30,000 a year. An additional 2 percentage points would increase that figure by £418 per year.
“If employer rates increase, this will potentially lead to a reduction in the amount the employee receives from the umbrella company because of the way the pay is structured,” she said. “The allocation percentage is the percentage they tell the employees. They might say: you get £500 a day. The problem is that by the time the worker actually gets it, all the taxes, the margins, everything comes out of that £500.”
Although umbrella workers are usually associated with IT, the NHS also employs many people who use the pay structure.
The rules surrounding paying taxes as a contractor have come under increasing scrutiny lately.
Getting paid through a company was seen as a good way to pay less tax before the government cracked down.
Highly paid freelancers, including BBC presenters, were hit with huge tax bills after authorities decided they were abusing a system designed to help genuine small businesses that had variable work, likely from a number of sources.
By using these personal service companies, employees could avoid national insurance payments and also be paid through dividends, which are taxed at a lower rate than income.
The new budget measures will be viewed by employers in combination with the 6 percent increase in the minimum wage and also the government’s proposal to strengthen workers’ rights.
The minimum wage, or national living wage for over-21s, will rise from £11.44 to £12.12 to £12.20 from next year.
The Low Pay Commission, which advises the government on the national living wage, has said it expects the level to rise to £12.10, but that stronger profit growth has driven a bigger increase.
Labor will also ban exploitative zero-hours contracts and “unscrupulous” practices of firing and rehiring workers, which it says will benefit millions of workers.
Higher wages and stronger worker rights could encourage more employers to use temporary workers.
