The flexible workforce contributes £331 billion a year to the UK economy, helping to deliver essential public services, repair infrastructure and grow sectors such as engineering, IT and financial services. But the new Labor government’s first budget demonstrates that it has not yet understood the nuances of this vital market.

Recruiters who depend on the talent of entrepreneurs and freelancers will need to understand the intricacies of the announced changes in order to make the right decisions for their business. This could include a bold change in recruitment strategy, while preparing for the upcoming crackdown on non-compliant umbrella companies, which has also been confirmed.

Don’t forget the “disguised employees”

The main announcement for the flexible workforce was the same as for traditional employers: the 1.2 per cent increase in Employer’s National Insurance and the reduction in the secondary NI threshold of £9,100 at £5,000. Although the government wants this tax increase to have no impact on employees’ take-home pay, this is unlikely to be the case for the 700,000 workers employed by umbrella companies across the country.

When the last government introduced changes to the off-payroll working rules, or IR35, its consultation paper referred to these flexible workers as “disguised employees”, who would have to pay employment tax “inside the IR35”. The changes made public and private sector employers responsible for determining the tax status of any self-employed worker and responsible for any errors made in the complexity of these arrangements.

This element of “disguise” could explain why Labor appears to have overlooked the impact of employer IN on this population of workers. The rates of these workers are agreed and fixed between the final hirers and the umbrella companies or agencies that hire them. If contract rates do not change in response to employers’ NI increasing, these businesses, which operate on low margins, will not be able to compensate their workers for the loss of net income. This creates a problem for all cogs in the flexible labor supply chain, who will all struggle to avoid financial loss.

Some umbrella employees will inevitably pressure their employers and recruitment agencies to renegotiate the total amount charged to their clients to ensure their take-home pay is not affected. The alternative would be for them to seek work outside IR35, which would limit the talent pool available to recruiters who do not currently use genuine independent contractors.

So, as well as increasing costs for direct employees, hirers will need to consider extending the NIC increase to all temporary workers currently determined to fall within IR35 for tax purposes. Whether this is possible or not, it will be important to maintain transparent and honest conversations about pricing with agencies in order to retain workers.

Alternatively, businesses may wish to reassess their IR35 policies to allow contracts to be offered outside of IR35, a move which could significantly increase their access to talent. Given recent changes to off-salary working rules, offering contracts outside of IR35 now carries less risk than when it was introduced, making it a viable strategy to alleviate the talent shortage and increased of the number of NICs.

Umbrella market regulation

The other important aspect of the budget for flexible workforce and its hires was the commitment to tackle non-compliance in the umbrella company market. This is something that compliant players in the sector have been calling for since the non-salary changes were introduced in 2017 and 2021, so it is a long overdue move.

Although the reform looks like a repeat of proposals made at the last government consultation, the move is in the right direction, seeking to close dodgy umbrellas and push employers, agencies and workers towards compliant providers.

But it appears that the Treasury still believes that agencies or final funders should be ultimately responsible for calculating PAYE. This will result in any liability for non-compliance being transferred to agencies or end providers if there is no agency in the supply chain.

The proposed operating mechanisms seem a little confusing and are not entirely clear at this stage, but this will become clearer following further consultation on the Bill planned in the coming months – any changes will not take effect until April 2026 at the earliest.

In the meantime, to avoid the pitfalls of tax liabilities and fines resulting from a crackdown, employers should ensure that they or their supply chains have a compliant preferred supplier list from umbrella companies, make demonstrate due diligence and work with established and trusted suppliers. They should also review IR35 policies to ensure that no contracts fall unnecessarily under the off-payroll rules and that all independent contractors are engaged in accordance with the external.

The Flexible Workforce: What Next?

The budget presents other challenges for the flexible workforce and the businesses that depend on it. Faced with increased financial pressures from rising NICs and the certainty of tougher regulations on umbrella companies, recruiters must navigate an increasingly complex and costly landscape.

Matt Fryer is a Chartered Tax Advisor at Brookson Group