Employer NI Costs Are Up: Here’s What That Means for UK Contractors

The Impact of the 2025 Employer’s NI Increase on the UK’s contract recruitment market has been significant. 

From cancelling the summer party to losing staff or even closing the doors completely, many companies have struggled to cover the increased cost of Employer’s NI in 2025. It isn’t just the 1.2% increase from 13.8% to 15% – the threshold from which businesses must make Employer’s NI contributions has also been reduced from £9100 to £5000. And, as Employer’s NI is calculated as a percentage of an annual salary, the increase seems to be having a greater impact on jobs at the more senior end of the market. 

Many company payrolls are now under strain and in some cases, budgets that were earmarked for permanent hires have been eroded. The increased cost of hiring permanent employees has made hiring a contractor a potentially more attractive option. Redundancy risks remain very high, but we are halfway through the year & projects still need to be delivered. Businesses are assessing whether they need certain roles to be full-time or if, in fact, they can get the same results from a contractor based on e.g. a 3 day per week or a fractional model. 

The increase to Employer’s NI, typically doesn’t affect contractors operating “Outside IR35” in the same way. They generally pay themselves a lower salary and take most of their earnings via dividends. The dividend tax rates are lower than for PAYE, basic is 8.75%, higher is 33.75% and additional is 39.35% – PAYE rates are 20% for basic, 40% for higher and 45% for additional. Basic rate is paid on earnings from £12,571 to £50,27, higher rate from £50,271 to £125,140 and additional rate on anything over £125,140. Employer’s NI is not payable on dividends; therefore, their Employer’s NI bill will not increase as significantly as for an employer making payments based on a full annual salary. 

Contractors themselves though, have also been squeezed in recent years. The dividend tax free allowance has been reduced to £500 p/year – as recently as in 2017/18 it was at £5000 p/ year. 

There are fears of a further tax raid in the Autumn – with some commentators proposing the allowance could be reduced to a mere £250 p/year. Of greater concern is the concept of increasing dividend tax rates to 20%, 40% & 45% to create “parity” in the tax system.  This would effectively negate the question of whether a role is “Inside” or “Outside IR35” and many contractors have been squeezed so hard, I’m not sure there is anything feasibly left to squeeze out of them. 

However, we may still see a significant rise in contract vacancies, which would be good for the contract market. We may already be seeing signs of this – based on the Recruitment Employment & Confederation’s latest data “the downturn in temp billings slowed since April to the softest in six months”. It is likely that this will be driven by demand for part-time contractors – whilst businesses figure out which roles are essential & which elements can be handled by AI (we’ll explore the impact of AI on the contract market in our upcoming mid-year update). This may culminate in most contractors working with at least 2 clients at once – and could mark a significant turning point – away from long-term “disguised employment” to genuine “self-employment”. In those circumstances – it would seem unfair & counterintuitive to increase the rates for dividend tax, but we will have to wait until the Autumn budget to see if the Chancellor agrees.