UK Firms Hire Contractors Instead of Employees to Cut Tax Bills

UK businesses are turning to the self-employed in an effort to rein in costs as they try to navigate Chancellor of the Exchequer Rachel Reeves’ 拢26 billion ($34.5 billion) payroll tax hike.

Advertised contract jobs have risen 22% since April, when the tax rise came into effect alongside a near 7% increase in the minimum wage, according to Adzuna figures shared with Bloomberg. In contrast, vacancies for permanent jobs have declined 9%.

The findings show how firms are responding to Labour’s decision to increase social security contributions by shifting away from full-time staff toward contractors, who carry out short-term assignments, receive no employee benefits such as health care and, crucially, settle their own tax and national insurance affairs.

“Businesses are now thinking ‘these self-employed are a more attractive option, I don’t need to pay NI, I can save money.’ We’ve been hearing from some that this is helping them find workers,” said Joshua Toovey, senior research and policy officer at IPSE, a trade group for the self-employed.

Companies have shed more than 180,000 employee jobs since the hike was announced in October, according to , with purchasing-management data pointing to a further slide last month. The slowdown in the labor market and stagnant economic growth are forecast to persuade Bank of England policymakers to cut interest rates for a fifth time on Thursday.

According to Adzuna, a jobs search website, advertized contract roles are above year-earlier levels, whereas demand for permanent jobs has fallen. Labour Force Survey figures show has risen by over 100,000 in the past 12 months, though doubts remain over the accuracy of the data due to a collapse in response rates.

The drop in payrolls has been concentrated in sectors that are highly exposed to higher employment costs, like construction or hospitality. Most of these also rely on a high share of self-employed staff, suggesting they can easily switch away from payrolled workers to cut costs without losing capacity, according to an analysis of tax data conducted by Pantheon Macroeconomics.

“If jobs are falling because firms are adjusting their workforces to higher costs, you don’t simply want to cut rates,” said Rob Wood, chief economist at Pantheon. “Firstly, we have tax hikes that will be pushing up inflation, but secondly, that’s more of a one-off adjustment. Once firms have adjusted their workforces for the higher costs, the job falls will stop.”

Separate survey data from recruitment agency Hays confirms the pivot to contractors. Among businesses hiring staff, almost a third were looking for contractors in February, up from just a quarter at the end of summer 2024.

The drop in permanent roles across the economy is also prompting more workers to make the switch to self-employment. Job-seekers typically look for a full-time position for about four to six weeks before they decide to turn to contract or temporary work, according to Tom Way, chief executive officer at Hays UK and Ireland.

“There’s only so long that somebody will give it to find a permanent job before they think that they have to go contracting,” Way said.

Photograph: Commuters outside the headquarters of the Bank of England in London; photo credit: Jason Alden/Bloomberg