IR35, Rising Employer NICs and 5.2% Unemployment: Is the UK About to Kill Its Freelance Economy?
OPINION
The UK labour market is in trouble and people from all walks of life are scared.
Unemployment has hit a five-year high of 5.2%, wage growth has cooled to 3.4%, and businesses are caught between rising overheads and mounting fiscal pressure.
As the Chancellor prepares the next Budget, the freelance economy — historically, Britain’s most effective safety valve — faces a fresh threat from any potential tax hikes and the lingering damage of IR35 blanket bans.
This is the story of how we got here, what must not happen next for the UK economy, and what the 2026 Budget must get right.
Why are UK payroll numbers shrinking?
The Office for National Statistics has confirmed the jobs market is contracting. The Guardian reported the number of people on company payrolls fell by 134,000 from a year ago, and by 46,000 over the last quarter of 2025. On a monthly basis, payrolls fell by 11,000 in January.
The culprit, in large part, is the 2025 Employer National Insurance increase — raising the rate to 15% and cutting the secondary threshold to £5,000.
For SMEs, the maths became too much. When the tax cost of a permanent hire outweighs their productive value, the role is simply deleted. Wage growth has cooled not because workers are less productive, but because businesses are diverting what would have been pay rises into their NIC obligations. Employees are earning less in real terms even as their employers pay more.
The freelance economy should be the natural response to this — offering businesses flexibility without the long-term liability of a permanent contract. But it isn’t working that way.
Mass layoffs paired with higher employee costs are pushing more workers into the freelance economy. That is driving up competition among anyone looking for work. Plus, weakening pay growth is having a trickling effect on the bargaining positions of workers and freelancers alike.
IR35’s shadow: Why blanket bans still haunt hiring companies
Many large firms — particularly in the public, financial services, construction and energy sectors— continue to impose blanket bans on non-PAYE contractors. Rather than conducting proper Status Determination Statements (SDS), they default to classifying all contractors as inside IR35. The effect is to strip freelancers of their independence while requiring them to pay employee-level tax without receiving sick pay, holiday pay, or employer pension contributions.
The roots of this go back to 2017. When the off-payroll rules first arrived, businesses panicked. The legislation had a serious flaw: hiring firms could be liable for up to half of all fees paid if a contractor was misclassified. Case law was unsettled. HMRC enforcement was unpredictable. Blanket bans made commercial sense at the time.
They no longer do, but the bans have outlasted the logic behind them.
The financial consequences for contractors and, in many cases, the UK, have been significant. Work that once went to small, specialist UK contractors now flows to large multinational consultancies, often based overseas.
James Brown, an HSE consultant working in the energy sector, is direct about the impact: “Much of the work that previously went to small one or two-person limited companies now goes abroad to multinationals, as a direct result of blanket bans introduced after the 2021 off-payroll reforms.”
Some contractors’ livelihoods and standard of living have been so impacted that they have decided to leave the UK. Vic Poole, a contractor specialist in OBD and CAD, is an example.
Outside IR35 work almost completely disappeared after the 2021 changes to Off Payroll Working. Income has halved since. I thought long and hard and have decided to leave the country. Massive upheaval, but I can no longer see a future in UK where I am able to provide the same standard of living for my family.
–Vic Poole, OBD and CAD contractor
Risk and public policy expert Anita Dorothy Millar, who advises financial services clients on regulatory change, argues that HMRC’s tax take from IR35 is likely eclipsed by what it has lost — particularly in VAT revenue — before accounting for the broader economic and social costs. She also raises a more fundamental concern: IR35 has interfered with the common law right to contract.
Millar’s view is that the solution lies in simplification. People operating through limited companies already have a framework — they have one, and they abide by it. The complexity of the current tax code is itself a cost and removing it would allow people to get on with building businesses.
IR35: Government is turning its back on small businesses
Government procurement programmes marketed as small-business-friendly are coming up short, too. Arguably, to the detriment of sectors, such as defence, that are up against the clock.
“For me, IR35 forced me back into salaried employment with the corporate constraints that come with it,” Rob Jackson, a Principal Consultant in Unmanned Aircraft Systems (drones) and Research & Technology, tells The Freelance Informer
He continued, “The insistence within the UK MOD’s Enterprise Defence Partnership for SMEs to come under umbrella organisations to meet Mode 1 ‘bum on seat’ resource requirements for 2-week notice 3-month contracts is unsustainable.”
Jackson suggested many consultants working within the defence sector are aware that the Ministry of Defence “cannot find the expertise to support the daily mission from within.”
He suggested a solution:
Maybe the replacing of IR35 with a realistic framework is the only answer – SMEs that don’t charge £3k per day (PWC/Deloitte etc.) may then provide that much-needed plug-and-play expertise that Defence Equipment & Support need to give them bandwidth to get on with the day job.
What has actually changed since 2017?
Despite the ongoing damage, the legal and regulatory framework has changed materially in contractors’ favour — and many firms have not changed their stance despite it.
Dave Chaplin of IR35 Shield argues that IR35 is no longer a credible commercial reason to avoid contractors. In a report, he explains how a 2024 legislative fix removed the double taxation risk, bringing worst-case exposure down to under 10% of contractor fees — and closer to 1% for well-run businesses.
In September 2024, the Supreme Court resolved a decade of legal uncertainty through its Atholl House Productions ruling, confirming the principles that firms can now rely on when making status determinations. HMRC’s enforcement approach has also matured, focusing on the quality of a firm’s processes rather than technical perfection, with low-risk cases typically concluding within months.
Firms still operating under 2017-era assumptions are not being cautious — they are paying a premium in higher costs and slower delivery for a risk that has largely ceased to exist.
What the Treasury must not do
With unemployment at 5.2% and the freelance workforce already under pressure, there is one policy move that could turn a slowdown into a structural collapse: aligning Class 4 National Insurance with the 15% Employer NIC rate.
Both the Resolution Foundation and the Institute for Fiscal Studies (IFS) have long argued for NIC alignment, contending that the current disparity creates labour market distortions by effectively subsidising self-employment. But the consequences of acting on that argument now would be severe.
If the tax bill for a freelancer becomes identical to that of a permanent employee — while the perceived compliance risk of an HMRC investigation remains — businesses will simply stop engaging external talent. This would be IR35 on steroids: pushing highly skilled workers either out of the UK market or into long-term unemployment, at precisely the moment the economy most needs flexibility.
What the 2026 Budget must deliver
Rather than treating the self-employed as a tax loophole to be closed, the government should recognise the freelance economy as the agile engine of British growth — particularly in digital, engineering, and creative sectors.
Three priorities stand out.
First, statutory clarity. A clear, simplified legal definition of self-employment would give HR departments the confidence to hire outside of PAYE without fear of HMRC challenge.
Second, VAT threshold reform. Raising the current £90,000 threshold to £120,000 would allow micro-businesses to grow without hitting a financial cliff-edge that currently discourages expansion.
Third, a tax regime that reflects risk. Freelancers do not receive sick pay, holiday pay, or employer pension contributions. The tax system should acknowledge this — not punish it.
The 2026 economy and the jobs market will be defined, in part, by how the government chooses to see the self-employed. The freelance workforce is not a loophole. It is a structural asset. Right now, it is being treated as a problem to be solved rather than a strength to be protected.
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