Many businesses are finding that recruitment and retention are becoming increasingly challenging, as it can often feel like forces beyond your control are putting off the right candidates.
Part of that pressure comes down to tax, as the gap between the effective rates for employees and the self-employed is wide and it’s nudging people towards contracting.
You might not be able to change tax policy yourself, but there are practical steps you can take to make employed roles more attractive.
You will have undoubtedly noticed employment costs rising as increases to the National Living Wage (NLW), National Minimum Wage (NMW) and employer National Insurance Contributions (NICs) have pushed up the price of hiring and retaining staff.
At the same time, a cooling job market makes new recruitment less appealing.
Against that backdrop, the tax edge enjoyed by the self-employed is fuelling the trend to go it alone.
The effective tax rate for self-employed workers is forecast at 17 per cent in 2025–26, versus 27 per cent for employees.
This gap means an employee could pay around 55 per cent more tax than an equivalent self-employed worker, which often serves as a powerful incentive to switch career paths.
Much of this distortion stems from last year’s Autumn Budget changes when employer NICs were increased, a cost borne by employers and, indirectly, by employees, while the self-employed were not subject to the same rise.
Employees also face slightly higher NICs than the self-employed, which further widens the divide.
You should keep in mind that regular employment still brings benefits that contracting does not easily deliver.
Pay stability, statutory sick pay, holiday pay and employer pension contributions are tangible perks for staff who value security.
A competitive workplace pension scheme is a big draw as it helps employees build long-term savings without having to research and set up their own arrangements.
Strong family-friendly policies, including paid maternity and paternity leave, can also make employed roles more attractive.
As accountants, we can help you see where you have room to be competitive.
That might mean modelling total reward packages such as salary plus benefits, reviewing pension contributions, or redesigning pay structures so you can offer more take-home value without overstretching budgets.
It’s also worth remembering that the current advantage for the self-employed could be reduced by future policy changes.
The Chancellor could adjust tax or NICs for employees or the self-employed, which would shift the balance.
If the Government brings the self-employed more fully into the tax/NIC net, the relative merits of traditional employment will become clearer again.
Until any policy change arrives, focus on making employment comparatively compelling.
We can help you review your reward package, ensure payroll is efficient and compliant and invest in HR support so your retained staff feel valued.
As businesses work to weather the current economic climate, we will help support you in creating a rewarding work environment for your team.
