Tax cut welcome, but industry regulation remains a priority ahead of Spring Budget
The main rate of National Insurance has been cut from 12% to 10%, as announced by Chancellor, Jeremy Hunt, at the Autumn Budget in November last year.
The measure came into effect on Saturday 6 January, and applies to all employed individuals earning over £12,570 per year. This will include umbrella workers, who – as payrolled employees – also stand to benefit from tax savings as a result.
Billed as a “historic” tax cut for 27m people, the move will “directly reward hard-working people, putting £450 back in the pocket of the average worker and helping them make ends meet”, according to the Prime Minister.
The government has claimed that millions of workers “will now be better off” financially due to the change. Its own estimates, based on a salary of £35,400, suggest the average worker will save £450 per year.
Each worker’s savings will vary, however, with HMRC having also launched a tool to help employees, including umbrella workers, calculate how much the 2% tax cut will save them.
While the cut has been welcomed, experts have pointed out that the government could do more to support flexible workers, including regulating the umbrella industry.
What the change means for umbrella workers
As umbrella workers operate on the payroll of umbrella companies, they are subject to PAYE taxes, including Class 1 National Insurance. PAYE sees taxes deducted at source by employers. All workers earning between £242 and £967 per week pay Class 1 NI on those earnings, at the new rate of 10%.
Previously, a worker earning £242 per week could expect to pay £29.04 per week in Class 1 National Insurance Contributions. Now, the same worker will pay £24.20, saving almost £5 per week.
However, many umbrella workers are exposed to tax avoidance schemes. Other malpractices, such as withholding or skimming holiday pay are also rife in the sector.
Sole traders also stand to benefit from tax break
While this move affects employed workers, the self-employed also stand to benefit from National Insurance cuts which are set to come into effect at the start of the next tax year.
Part of the same package of tax cuts, this move will help to extend these savings to sole traders, reducing Class 2 and Class 4 National insurance by 2% from 6th April this year.
Cuts to the various National Insurance rates are part of the government’s efforts to reduce taxes.
Speaking on Saturday as the change came into effect, Rishi Sunak said it was possible to cut taxes “because of the tough decisions this government has taken” to steady the economy.
The Chancellor also said the government had delivered on its pledge to halve inflation and was in a position to offer tax breaks.
“We’ve turned a corner and are cutting taxes”, he said, giving “hard-working Brits… a little more cash in their pockets” as a result.
Regulation needed to protect workers
Speaking following the Autumn Statement – when this cut was announced – Julia Kermode, CEO of umbrella compliance specialist, PayePass, said the move would “help to alleviate the cost pressures people are facing” due to the cost of living crisis.
While positive in one respect, however, Kermode also highlighted at the time that the government could have prioritised umbrella regulation, rather than minor tax cuts. Instead, she accused the government of missing “yet another opportunity to deliver on its promise to regulate the umbrella industry” and called for “some form of regulation” to protect workers.
The government has previously committed to regulating the sector via a Single Enforcement Body (SEB). Planned to be “taken forward via primary legislation when parliamentary time allows”, the government is running out of time to do so, with a general election due in the next 12 months.