Two reasons why freelancers are wary of the ‘jobs tax’ being hiked at the Budget

By Fred Hicks Senior Policy and Communications Adviser at IPSE - The Self-Employment Association

The Labour government has been forced to defend its pledge to not raise rates of Income Tax, VAT and National Insurance numerous times over the past week, as speculation that Employer National Insurance could be about to increase intensified. Labelled a ‘jobs tax’ by employers and business groups, an increase to Employer NI would likely be denounced for making hiring more difficult at a time when the UK’s underperforming jobs market is already under the microscope.

In the eyes of the Conservative opposition, it would be tantamount to breaking a pledge not to increase National Insurance; but Labour’s response would be that these pledges were made in the context of not raising taxes on ‘working people’. Semantics aside, Labour ministers haven’t ruled out the possibility of it happening at this month’s Budget statement.

If it went ahead, one interpretation is that it would be good news for the self-employed, whose relative attractiveness to hirers would increase.

But there are two important ways that the picture could actually worsen for freelancers and contractors if the jobs tax does go up – and they both have something to do with our old foe, IR35 .

It’ll make the umbrella company ‘double tax’ problem worse

When the off-payroll working rules were introduced to the private sector in 2021, swathes of contractors were told by their clients that unless they started working via an umbrella company – rather than their own limited company – their contract would be cancelled.

For contractors who continued to work inside IR35, one of the biggest points of annoyance was that their new umbrella employer appeared to be using their day rate to cover the cost of its own Employer NI costs. In fact, nearly three-quarters (72%) of umbrella contractors IPSE surveyed at the time of the reforms told us that they were covering the cost of Employer NI through a reduction in their day rate .

In effect, an inside IR35 contractor’s day rate is ‘double taxed’ – covering the cost of their own employee contribution, as well as their employer contribution.

Whilst contractors are now wary of this and can factor the additional cost into the rates they negotiate with their clients, they’re still vulnerable to the impact of future tweaks to the rate of Employer NI.

So, if the Chancellor does increase this tax, it’ll be passed immediately onto umbrella company contractors – with no guarantee that their client will agree to an increased day rate to compensate the difference. Whilst the government could put forward arguments for why it isn’t the case, it’s difficult to see how this wouldn’t contradict Labour’s pledge not to increase tax on working people.

It puts the outside IR35 tax gap under even more scrutiny

The second way that an Employer NI increase could harm the contractor sector comes down to clients’ reluctance to get on the wrong side of HMRC when it comes to IR35. To understand why, we need to look at what’s really at stake with these rules.

IR35 was introduced as anti-tax avoidance measure targeting individuals who work like an employee but receive payment via an ‘intermediary’ – usually a limited company. As a result, their earnings can be taxed at marginally more favourable rates than that of a standard PAYE employee.

But this overlooks the much bigger chunk of money that government receives when a person becomes employed rather than self-employed – and that’s Employer National Insurance. This is the portion of tax that the Treasury is really interested in – and it’s the reason why, from a tax collection perspective, the off-payroll working reforms have been so successful, after propelling thousands of contractors onto payrolls almost overnight in April 2021.

So, if the government does decide to hike Employer NI, it would increase this lucrative tax differential between employees and the self-employed – and therefore make a client’s decision whether or not to hire contractors on an inside or outside IR35 basis even more critical in the eyes of the Treasury.

Ultimately, this could lead to an even more fraught environment for hirers wanting to work with freelancers and contractors. The tax differential between employees and the self-employed would be even bigger which means the boundary between them will be even more heavily policed. The natural inclination that exists within HMRC to push everyone into the ‘employed for tax purposes’ category will be even stronger.

Employer NI is the elephant in the room when it comes to taxing different forms of work. As long as Employer NI exists, we’ll never get to a place where firms feel confident engaging talent on a self-employed basis, without HMRC glowering at them suspiciously. Increasing Employer NI will only make the problem worse.