New tax on dividends and National Insurance will hit company directors and umbrella workers

The Prime Minister has announced a “health and social care levy” to address the funding crisis in the sector in the form of a 1.25% rise in National Insurance and tax on share dividends. This will come as a blow to many contractors, both company directors who were excluded from Covid-19 support schemes, and those forced to work inside IR35 under an umbrella company.

Rebecca Seeley Harris, former adviser to the office of tax simplification and chair of the Employment Status Forum, explains the changes: “The levy set out today by the Prime Minister will be made on both the employed and self-employed whose income falls above the Primary Threshold/Lower Profits Limit of £9,569. The dividend rate will be increased to 8.75% and 33.75% respectively. This will increase from April 2022.

“The Treasury report states that only 40% of individuals are affected by the increase because of the combination of the £2,000 tax-free allowance and the personal allowance. But this 40% is made up of those who were also excluded from any meaningful help during the pandemic. They are the forgotten and now bear this burden too. Thousands are still struggling, especially those in events, hospitality and the arts.

James Poyser, CEO of inniAccounts and founder of adds: “Limited company professionals already had a corporation tax hike earlier in the year so this news will really hurt at a time when many are still trying to recover from the impact of IR35 off-payroll reforms and the economic fall out of Covid-19.

“We had hoped that this cohort of workers would be left alone but this will be seen by self-employed professionals as yet another cynical indictment by the Conservative government on so called personal service companies. The government are blinkered to the benefits that these companies, self-starters and entrepreneurs bring to the economy, and the value they offer companies across the UK. We will continue to work with BEIS to ensure policy reflects the changing nature of work and that workers’ rights are upheld.”

What this means for contractors employed by umbrellas

  • Contractors employed by umbrella companies will see a 2.5% increase in tax

“In the case of umbrella company workers, most will end up paying both the employers and employees NICs rises so they will be taxed twice. This is obviously another blow to workers who are already in a precarious position. This will include care workers and NHS staff (working in the sector that the levy is supposed to fund) going through umbrellas – more and more are expected to be self-employed or must agree to be employed through agency umbrellas, many of which are unethical. It’s an untenable situation for them.”

Umbrellas need regulation. The umbrella market is unregulated and there are some very unscrupulous business models in play. Scams to skim pay are a huge problem in the sector and many people are already being duped out of money that is rightfully theirs. That’s why Rebecca and James have submitted a policy to HMRC and BEIS to regulate the market and level up the playing field in the umbrella market – there are well-run umbrellas but they are few and far between and until it’s addressed, workers’ rights will continue to be exploited.

Read more about Rebecca and James’s Umbrella Regulation Policy