Budget Update: Key tax and policy changes for recruitment agencies

Yesterday’s Budget has introduced several key changes that may impact you, recruitment agencies, and contractors.

Below, we’ve outlined the major updates, with insights on how these might affect your planning and strategy.

Key highlights

• A renewed Government commitment to tackle serious tax fraud and non-compliance within the umbrella market.
• Debt transfer to recruitment agencies to ensure umbrella compliance from 2026.
• National Living Wage to rise to £12.21.
• Employers Class 1 National Insurance contributions are set to rise to 15%, with an accompanying reduction in employee thresholds (down to £5,000 from £9,100).
• Capital Gains Tax rates are set to rise across the board.
• Changes to the Inheritance Tax regime will see pension pots and AIM listed shares brought within the scope of IHT.
• Additional rate of Stamp Duty Land Tax to rise to 5%.
• Non-Dom status to be replaced by a residency-based system.

Umbrella companies and compliance

The Government continues to focus on compliance within the umbrella company market, targeting non-compliance with stricter regulations.

This renewed scrutiny may impact agencies partnering with umbrella companies, increasing the need to ensure all umbrella arrangements meet strict compliance standards and ensure providers are operating PAYE deductions correctly.

Debt transfer risk is being introduced in 2026 and PAYE obligations are shifting to recruitment agencies, or end clients if there’s no agency in the supply chain.

Agencies will likely be reviewing their umbrella suppliers to ensure alignment with these changes to avoid risks associated with engaging non-compliant providers.

Employment taxes

From April 2025, Class 1 National Insurance Contributions (NIC) for Employers will increase from 13.8% to 15%. Additionally, the threshold at which employers start paying NICs per employee will drop from £9,100 to £5,000 annually, raising costs for businesses with larger workforces.

To help offset these changes, the Employer Allowance will increase from £5,000 to £10,500, and the previous £100,000 NI cap has been removed, making the allowance accessible to all employers.

Business matters

In April 2025, the National Living Wage for those over 21 will rise by 6.7% to £12.21 per hour, and the National Minimum Wage for 18- to 20-year-olds will increase by 16% to £10 per hour. These changes could impact wage costs for businesses employing hourly workers.

Corporation Tax rates were confirmed to remain stable, with the main rate at 25% and the small profits rate at 19% for the duration of this Parliament. Additionally, the Government has committed to retaining the full expensing regime for capital allowances, the £1 million annual investment allowance, and current R&D tax relief rates under its Corporate Tax Roadmap.

Sectors like retail, hospitality, and leisure will benefit from permanently reduced business rates multipliers, and the small business rate multiplier will also be frozen, providing continued relief for small businesses.

Taxes on individuals

The Capital Gains Tax (CGT) standard rate is rising from 10% to 18% and the higher rate from 20% to 24%. Business Asset Disposal Relief and Investor Relief will also increase, with rates moving from 10% to 14% in April 2025 and to 18% in April 2026. For those handling carried interest, the CGT rate will rise to 32% from April 2025, with a full shift to Income Tax treatment planned for April 2026.

Inheritance Tax (IHT) tax-free thresholds remain frozen until 2030. Unspent pension pots will fall under IHT from 2027, and Business Property Relief will be reduced to 50% for shares not listed on recognised stock exchanges, such as AIM.

The non-domicile tax status will be replaced with a residence-based system, potentially increasing tax liabilities for those with international income.

Other changes include a rise in the Stamp Duty Land Tax (SDLT) on additional properties from 3% to 5% starting 31 October 2024, and an extension of the Enterprise Investment Scheme to 2035, offering longer-term incentives for investors.

Strategic considerations

This Budget reflects a substantial shift in fiscal policy, designed to generate revenue primarily from employers and wealthier individuals. The employer NIC rate increase and reduced threshold will likely have the most significant impact on mid-to-large employers, adding to payroll costs. While the Government sought to mitigate some of this with corporate tax stability and increased Employer Allowance, this change will affect cash flows and budgeting for many.

While the Budget introduces higher costs, it maintains supportive measures like the corporate tax stability and sector-specific reliefs. Recruitment agencies, particularly those placing contractors or managing payroll, should act quickly to assess how these changes may affect operations, client budgets, and overall growth strategies.

If you’d like to discuss these changes in more detail or explore strategies to adapt, please don’t hesitate to reach out.