Labour’s Autumn Budget: The Lesser Of Two Evils For IT Contractors

Rachel Reeves with the famous Chancellor's red box which includes the Autumn Budget 2024

After a landslide win for the Labour Party in the surprise general election in July 2024, Rachel Reeves, the new Chancellor of the Exchequer, announced the government’s first Autumn Budget report on Wednesday. Rumours had been circling over the past few months about the exact details of the budget, with Keir Starmer warning it would be “painful”.

IT contractors have faced continual difficulties from governmental budgets since the Off-Payroll Working Regulations (IR35) changed in 2017. Since then, many contractors have found it harder to secure outside of IR35 positions, which has affected their take home pay.

Whilst the Autumn Budget wasn’t as dire as many of us feared, for many IT contractors, it will mean potentially a reduction in contract opportunities and ultimately, less in their pockets.

Increased Employer’s National Insurance

Employer National Insurance will rise to 15% in April 2025, up from 13.8%. Whilst PAYE permanent IT professionals will not be affected by this change, those working through Umbrella companies will be taking home less, due to the increased employer costs. This change might sound minimal, however, in my talks with multiple Umbrella specialists and providers, the average IT contractor working via an Umbrella will be £17 worse off per week due to the increase.

I will also be very interested to see how many recruitment agencies take steps to ensure compliancy, through the distribution of revised Key Information Documents (KID), when this change comes into effect in April 2025. Only time will tell…

Rise in Capital Gains Tax

Disappointingly for most entrepreneurs in 2020, the previous government reduced the lifetime threshold on BADR (Business Asset Dissolved Relief) from £10 million to £1 million, and since then we have seen a marked decrease in investment for tech startups. Most recently in 2023, we saw a concerningly low 38% reduction in investment for tech startups.

Tech startups are always a welcome sight for many IT recruiters, as they often scale rapidly, attract a wealth of local tech talent, and stir up the job market. This can lead to large-scale hiring drives or the replacement of departing employees, creating disruption within the industry.

With the rate of Capital Gains Tax that applies to BADR increasing from 10% to 14% in 2025 and to 18% in 2026, it is likely this move will further disincentivise many entrepreneurs and investors from scaling up tech startups, which many individuals do with the goal of selling to big players for profit. Thus, creating a domino effect for the industry, hitting both IT contractors and permanent IT professionals hard.

I would have preferred to have seen some sort of tax break available to restart investment and growth in the tech sector, but unfortunately that was not to be. Whilst there would have been less tax for the government at the front end, a boost to startups would inevitably have created more tax being collected through greater employment further down the line.

Corporation Tax remains the same

Business owners and IT contractors breathed a sigh of relief when Reeves announced Corporation Tax would not be altered. Reeves, in fact, stated that Corporation Tax would remain at 25% for the term of this government, possibly until 2028, making the UK has one of the highest Corporation Tax rates in Europe.

For IT contractors, this announcement that Corporation Tax will not drop for at least 4 years is likely to be frustrating. PSC contractors often choose to only engage with off-payroll opportunities to be more tax efficient, but with Corporation Tax remaining high, and other employer costs rising, they’ve been handed a poor hand in this budget.

High Corporation Tax can discourage companies from abroad creating a base in the UK. We have previously seen US organisations setting up operations in the UK to springboard trade with Europe, however, I worry that they may be incentivised to go to the Republic of Ireland instead, where Corporation Tax is significantly lower at 15% (up from 12.5% earlier this year). This could mean fewer job opportunities for UK-based IT professionals, especially with global and multinational companies.

Higher responsibility for recruitment agencies

Although it was not mentioned in Rachel Reeves’ speech to Parliament on Wednesday, the full governmental budget posted online states that responsibility will be placed on recruitment agencies, or the end client if no recruitment agency was involved, to ensure that IT contractors are paying the right amount of tax and aren’t being encouraged or allowed by Umbrella agencies to enter into tax fraud.

I have been in favour of this change for years and recently expressed this view in a Contractor UK article. Some in the industry found the opinion controversial, however, I agree with Rachel Reeves that it should be the recruitment agencies responsibility to do their due diligence on Umbrella companies and ensure that they are not soliciting tax avoidance, in exchange for kickbacks and free TVs!

Pension legacies

One of the rumours that many were preparing for involved lowering the maximum threshold for pension contributions, currently set at £60k. Thankfully, this did not come to pass. For many PSC contractors, one of the ways to be more tax efficient is to put as much money as they can afford into their pension pots. Now, this is a positive for IT contractors looking towards the future. However, it has been announced that unspent pensions will no longer be exempt in Inheritance Tax from 2027. This could mean that IT contractors need to make further legacy plans for their pensions going forward.

 

Overall, IT contractors continue to receive a raw deal. Over the years, many of them have been at a disadvantage due to IR35 regulations and countless numbers found themselves out of work in the tech recession. Moving forward, those that do manage to get themselves an outside IR35 contract will be paying a staggering amount of corporation tax, and now higher employer costs for those on-payroll. It could have been a lot worse, which is some consolation, but unfortunately for many IT contractors, this budget will make things harder for them.

 

VIQU is an award-winning IT recruitment agency, with vast experience supporting contractors, securing contract talent, and leading industry conversations around IR35 regulation and compliancy. For more information or assistance with recruitment, please get in touch with our team here.

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