Labour’s recent proposals to reform National Insurance Contributions (NICs) have raised alarm bells for many self-employed individuals across the UK. Although the party’s manifesto remains light on specifics, early hints suggest significant changes that could impact the tax burden of sole traders, contractors, and limited company directors, potentially affecting both employer and employee NIC thresholds and payroll strategies.
At the heart of the concern is Labour’s plan to increase the main rate of employer NICs from 13.8% to 15%. While this rise directly targets employers, many self-employed people who operate through limited companies act as both employer and employee in practice.
These reforms may also have implications for workers, influencing their rights and payroll obligations. As a result, the boundary between business and personal tax liability becomes blurry, and potentially more costly, especially when considering how income tax obligations may interact with the proposed NIC changes.
Industry leaders and advocacy groups are already voicing unease, urging Labour to provide more clarity and consideration for the self-employed, a workforce often left straddling the gap between traditional employment and entrepreneurial risk.
Many are asking how much tax self-employed individuals and small business owners will ultimately pay if these changes are implemented. Such tax and NIC changes are typically announced during the autumn budget, making it a key event to watch for further details.
What Are Labour’s National Insurance Contributions Proposals?
Labour has pledged to raise the main rate of employer NICs to 15%, up from 13.8%, if elected to government. The increase, expected to take effect from April 2025, is part of a broader aim to raise an estimated £25 billion to boost public services, including the NHS and education.
While the party emphasises that employees will not see a direct increase in their own NIC rates, the rise in employer contributions could indirectly affect wages, business costs, and tax planning, particularly for those who are both director and shareholder of their own limited company.
Changes to NICs may also impact earnings and the earnings limit, which are crucial for determining NIC liabilities and eligibility for certain state benefits. Directors and employees should pay close attention to the lower earnings limit, as earning above or below this threshold can affect both NIC obligations and state pension entitlement.
NICs are generally paid up to state pension age, and any changes could influence both state pension and state pension entitlement for individuals. Additionally, other benefits linked to NICs, such as statutory payments, may also be affected.
Employers and directors may become liable for NICs above a certain amount due to the new thresholds, making it important to review payroll and salary structures in light of these changes. As Labour positions itself as both “pro-business” and “pro-worker,” questions remain about how self-employed people, who often don’t fully fit into either category, will be treated under this evolving tax regime.
Employment Allowance: What Self-Employed Need to Know
The Employment Allowance is a valuable tax relief designed to help small businesses and self-employed individuals who also act as employers. For the 2025-26 tax year, eligible employers, including limited companies and small businesses, can claim up to £10,500 to offset their annual National Insurance liability.
This allowance is particularly relevant for self-employed individuals who pay Class 1 National Insurance contributions on behalf of employees or themselves as directors. To qualify, self-employed individuals must ensure they have a valid National Insurance record and are up to date with all tax payments.
The Employment Allowance is available to eligible employers who pay Class 1 National Insurance, making it a crucial support for those looking to manage the rising costs of employment and business growth. Claiming the Employment Allowance can significantly reduce the cost of hiring staff, making it easier for small businesses and self-employed individuals to expand their teams or invest in new opportunities.
To make a claim, ensure you meet the eligibility criteria and submit your application through your payroll software or HMRC’s online services. Taking advantage of this allowance can help offset the impact of higher employer NICs and support your business’s financial health in the coming tax year.
How Could Sole Traders and Contractors Be Affected?
Although sole traders do not pay employer NICs in the same way limited companies do, there are fears that changes in the broader system could create knock-on effects. For self-employed individuals, NIC liability is determined by their profits, with those earning above the lower profits limit being liable for Class 2 and Class 4 NICs, while those with lower profits may have reduced or no liability.
The calculation of NICs often references the previous tax year to verify compliance and ensure correct contributions. Self assessment remains the primary method for reporting both tax and NICs for the self-employed, with income levels directly affecting both NIC and tax obligations. Timely payment of NICs is crucial for maintaining compliance and ensuring entitlement to contributory benefits such as maternity allowance.
Self-employed individuals are liable for NICs when their profits exceed the relevant thresholds, and making these payments on time is essential for benefit eligibility. In recent years, legislative changes have altered the rules and thresholds for NICs, impacting how self-employed individuals calculate and pay their contributions.
For contractors operating through personal service companies, the higher employer NICs could mean an increased cost of paying themselves a salary via payroll. This could prompt a re-evaluation of business structures, with some considering whether remaining self-employed is financially sustainable in the long term.
Others may seek to pivot to umbrella companies or even full employment to sidestep the mounting compliance and tax challenges. Without targeted exemptions or allowances, these reforms could make self-employment less attractive, especially for those just starting out or working in lower-paid freelance roles.
Class 1 National Insurance: Key Changes Under Labour
Class 1 National Insurance contributions are paid by both employees and employers, including self-employed individuals who employ staff or act as directors of their own limited companies. Under Labour’s proposed reforms, significant changes are expected to Class 1 National Insurance, including an increase in the secondary threshold and a higher rate for employer National Insurance contributions.
For self-employed individuals who are also employers, these changes mean it’s more important than ever to understand how your National Insurance contributions and overall tax liability may be affected. The increase in employer NICs will impact businesses of all sizes, but especially those with employees or sole directors of limited companies who pay themselves a salary.
To stay compliant and minimise your tax burden, review your National Insurance record and ensure all tax payments are up to date. It’s also wise to explore available tax reliefs, such as the Employment Allowance, which can help reduce your annual National Insurance liability. As the government introduces new thresholds and rates, keeping informed about your obligations and planning ahead will be key to managing costs and maintaining business stability.
Sector Leaders Speak Out
The response from the self-employed sector has been swift and concerned. Seb Maley, CEO of contractor insurance provider Qdos, remarked: “While Keir Starmer has promised Labour will be pro-business and pro-worker, the needs of the self-employed are little more than a footnote in this manifesto.”
His concerns are echoed by Derek Cribb, CEO of the Association of Independent Professionals and the Self-Employed (IPSE), who highlighted the sector’s vulnerability to policy changes: “We need to see a clear commitment from Labour to recognise and support the self-employed as a vital part of the UK economy.”
With more than 4 million people in the UK working for themselves, many workers across England, Scotland, Wales, and Northern Ireland feel these reforms could overlook a sizeable and economically significant group. While self-employed workers are not entitled to the national minimum wage, changes to employment law and tax allowances can still have a major impact on their livelihoods.
Comparing Labour’s Plans to the Conservatives
In contrast to Labour’s employer NIC rise, the Conservative Party has committed to scrapping Class 4 NICs for the self-employed, currently paid by those earning between £12,570 and £50,270, by the end of the next Parliament. This move is positioned as a tax cut to encourage entrepreneurship and reduce complexity.
For example, a typical self-employed person earning £30,000 would see a significant reduction in their NICs liability under the Conservative proposal, while a company director might experience different effects depending on their mix of salary and dividends. There are also special rules for certain groups, such as share fishermen or volunteer development workers, which could mean their NICs are calculated differently under either party’s proposals.
Married women who previously qualified for the reduced rate of NICs may find their entitlement affected by these policy changes, especially as the lower rate and reduced rate options are phased out or adjusted. Some proposals have also discussed introducing a flat rate of tax relief on pension contributions, which would replace the current tiered system and impact how different earners benefit from relief.
These examples illustrate how changes to NICs and tax policy can have varied effects depending on individual circumstances. However, some analysts warn that such a cut could worsen inequalities in the tax system.
Paul Johnson, Director of the Institute for Fiscal Studies, warned: “The promise to abolish the main rate of self-employed NI contributions altogether would doubtless be welcomed by the self-employed but would further entrench the tax advantages of self-employment over employment.” This highlights a broader tension: how to fairly tax a workforce that increasingly blends traditional and self-employed roles.
What Might Happen to the Self-Employed Workforce?
Should Labour’s proposals move forward without adjustments for self-employed individuals, there could be wider shifts in how freelance work is structured. Payroll and National Insurance Contribution (NIC) calculations are often done on a 'week' or 'weeks' basis, which directly affects how self-employed or contractor payments are determined. For example, Class 2 NICs are paid at a fixed rate per week, and the total number of weeks of self-employment in a tax year impacts the overall NIC liability and entitlement to benefits such as maternity allowance.
Some people may turn away from operating limited companies and instead seek work through umbrella companies or permanent roles. Eligible businesses may qualify for certain reliefs or allowances under the new regime, but the criteria for eligibility could change, affecting who can benefit.
Additionally, connected companies firms with linked ownership or control may find that their combined payrolls influence their overall NIC liabilities and the way allowances are shared. There is also a maximum amount that can be claimed or paid under specific reliefs like the Employment Allowance, which could impact employer National Insurance liabilities.
This shift could lead to reduced availability of contractors in industries like tech, construction, and media sectors that rely heavily on flexible, project-based work. Self-employed individuals may need to consider making voluntary contributions to protect their entitlement to state benefits and the state pension under the new rules.
In the long run, these tax changes could influence the very shape of the UK labour market, potentially discouraging people from launching their own businesses or offering freelance services.
Conclusion
Labour’s proposal to increase employer NICs may be designed to fund essential public services, but its potential impact on the self-employed is far from clear-cut. With limited detail on how sole traders and limited company contractors will be affected, concerns are mounting that the UK’s vibrant self-employed sector could face higher tax bills and added complexity.
Industry leaders have warned that without specific measures to support these workers, many may reconsider their self-employed status. As the election approaches, this issue is likely to become a key point of contention, especially among voters who value flexible, independent work.
Frequently Asked Questions
What exactly is Labour proposing with National Insurance?
Labour plans to raise employer NICs from 13.8% to 15% from April 2025 to fund public services. The change does not currently include employee or Class 4 NICs.
How might limited company contractors be affected?
Those who pay themselves through PAYE from their own companies could face increased costs, as they act as both employer and employee for NIC purposes.
Are sole traders included in this NIC rise?
No direct changes have been proposed for sole traders, but broader shifts in the NIC system could still affect them indirectly through policy or future reforms.
How does this differ from Conservative tax plans?
The Conservatives propose scrapping Class 4 NICs for the self-employed, offering a potential tax cut for people earning up to £50,270.
What are industry experts saying?
Experts and industry bodies are urging Labour to provide clarity and safeguards for the self-employed, warning that the current proposals risk excluding this group.
