As the 2025/26 tax year approaches, it’s essential for umbrella contractors to be informed and ready for any changes that could impact their earnings, tax responsibilities, and overall financial planning.
With the government’s Autumn Budget 2024 setting the tone for the upcoming year, including key updates on income tax thresholds, National Insurance Contributions, and dividend allowances, it’s especially important for umbrella contractors to prepare as their earnings and deductions are managed through third-party payroll providers.
Proactive planning can help avoid unexpected deductions and ensure compliance with tax regulations.
Here’s a guide to help you prepare and navigate the transition smoothly.
Key dates to remember
6th April 2025: Start of the new tax year.
31st January 2026: Deadline for submitting self-assessment tax returns (if applicable) for the 2024/25 tax year.
5th April 2026: End of the 2025/26 tax year.
Changes announced in the Autumn Budget 2024
The Autumn Budget 2024 outlined several updates that may affect umbrella contractors. While every contractor’s circumstances will differ, the key points to be aware of include:
Income tax thresholds:
The personal allowance and other tax bands remain frozen at the same levels. However, as your pay increases, you will pay more income tax due to the ‘fiscal drag’ effect of the frozen tax bands.
National Insurance Contributions (NICs):
Employees NIC threshold is set to remain the same at £12,570 per year, with a rate of 8% payable above this threshold, however the Employers NIC threshold is being reduced to £5,000 per year, with an increased rate of 15% payable above this threshold.
Dividend allowance:
The tax-free dividend allowance will reduce to £500, continuing the government’s gradual reduction of this benefit as part of efforts to generate additional tax revenue and reduce the overall cost of the tax system.
Pension contribution allowances:
No major changes were announced, but it’s a good time to review your pension contributions to maximise tax relief.
How to prepare
Preparing in advance can help umbrella contractors avoid unexpected deductions and ensure their financial plans align with any tax changes. Below are key steps to take to stay on top of your finances and minimise any potential disruptions.
Review your payslips:
Understand your payslips, how your earnings are calculated, and what deductions are made by your umbrella company.
Update personal details:
Ensure your umbrella provider has your current address, bank details, and tax code.
Budget for tax code changes:
If your tax code changes, this will affect your net pay. Check your tax code on your first payslip of the new tax year.
Pension contributions:
Consider if you want to adjust your pension contributions to make full use of tax relief opportunities.
Stay informed:
Regularly check for updates from HMRC and your umbrella provider to stay aware of any mid-year changes. Staying informed about umbrella companies for contractors will help ensure you are aware of any industry developments. Useful resources include the HMRC website and umbrella industry news platforms like ContractorUK and The Freelancer & Contractor Services Association (FCSA).
Working with Fair Pay Services
If you have any questions about how the 2025/26 tax year changes may affect you, please get in touch with us. We’re here to help. You can reach us at helpme@fairpayservices.co.uk or call our Contractor Care team on 01604 360222.