Why Hiring Contractors could now be more Cost-Effective than Permanent Employees

Posted 1 week ago

With the 2025 National Insurance change set to take effect in April, UK businesses are facing higher employment costs. The National Insurance increase will see Employer National Insurance Contributions (ENIC) rise from 13.8% to 15%, while the threshold at which businesses must start paying contributions will drop from £9,100 to £5,000. This change will significantly impact businesses that employ permanent staff, making it more important than ever to consider alternative workforce strategies. One such strategy is Contractor Hiring instead of full-time employees.

How Much Will the Change Cost?

To understand the impact of the National Insurance increase, let’s look at an example:

Business A

Employees: 1000
Salary per employee: £34,800 (UK median average wage)

2024/2025 ENIC Liability:

£0 - £9,100 = No ENICs
£9,100 - £34,800 = 13.8%
Per employee: £3,546.60
Total: £3,546,600

2025/2026 ENIC Liability:

£0 - £5,000 = No ENICs
£5,000 - £34,800 = 15%
Per employee: £4,470.00
Total: £4,459,500 (after Employment Allowance)

This means Business A will pay an additional £912,900 annually (£923.40 per employee).

Want to calculate your business NI increase? Click here to access Artema’s calculator.

Is There Any Relief Available?

Yes—the Employment Allowance is increasing from £5,000 to £10,500, and eligibility restrictions will be removed. This means businesses can deduct up to £10,500 from their ENIC liabilities. However, even with this relief, most businesses will still see an increase in their employment costs.

How Can Businesses Manage This Cost Increase?

To offset these rising costs, businesses have a few options, including adjusting budgets, restructuring, or exploring more cost-effective employment models. One viable alternative is Contractor Hiring instead of full-time employees.

Why Hiring Contractors Makes Financial Sense

1. No National Insurance Contributions

Unlike full-time employees, contractors are responsible for their own taxes, National Insurance, and pensions. This means businesses can avoid paying the additional 15% ENIC rate altogether.

2. Reduced Overhead Costs

Permanent employees come with additional expenses beyond salary:

Pension contributions
Holiday pay and sick leave
Training and development costs
Other employee benefits (e.g., private healthcare, bonuses)

Hiring contractors eliminates these costs, allowing businesses to allocate resources more efficiently.

3. Increased Flexibility

Contractors can be hired on a project-by-project basis, ensuring businesses only pay for the work they need.
Businesses can scale their workforce up or down as required without long-term financial commitments.

4. Faster Hiring and Specialised Skills

Contractors are often experts in their fields, meaning they require little to no training.
The hiring process is quicker compared to full-time recruitment, helping businesses meet urgent deadlines and project demands.

5. No Redundancy Costs or Legal Liabilities

If business needs change, terminating a contractor’s contract is much simpler than making a full-time employee redundant.
Contractors do not have the same employment rights as permanent staff, reducing legal risks and potential disputes.

6. Budget Control

Businesses can allocate funds specifically for contractors, ensuring predictable and manageable costs.
Unlike salaries, contractor fees are a variable expense, allowing greater financial flexibility.

When Should You Consider Hiring Contractors?

Hiring contractors is particularly beneficial in the following scenarios:

When you need specialised expertise for a short-term project.
When your business has fluctuating workloads and you need a flexible workforce.
When you want to reduce long-term financial commitments and overhead costs.
When restructuring your business to manage the increased ENIC burden.

Conclusion: A Smarter Workforce Strategy for 2025

With the 2025 National Insurance change, businesses must rethink their employment strategies. While permanent employees remain essential for certain roles, Contractor Hiring provides a cost-effective, flexible, and efficient solution in the face of increasing financial pressures. By incorporating a mix of permanent staff and contractors, businesses can remain competitive, agile, and financially stable in 2025 and beyond.