Freelance contractors likely to become more expensive; NHS faces losing out on talent to private sector, say experts

Forthcoming changes to tax rules affecting self-employed individuals in the public sector could drastically reduce their take-home pay and cause talent to flee to the private sector, according to an internal local government analysis.

From 6 April, changes to the IR35 tax system mean public sector employers will have to deduct tax and national insurance contributions from contractors’ pay at source, rather than allowing them to defer and claim expenses. It means many people who work regularly in the public sector could lose almost a third (30 per cent) of their take-home pay as they will be subject to national insurance for the first time, the report said.

While the individuals involved are not being reclassified and remain either self-employed or, in many cases, agency workers, the move will affect both highly paid individual contractors and agency workers in frontline services, leading to fears both of a talent squeeze in some parts of the public sector and dramatically raised costs in others.

Neil Lupin, managing partner of Green Park, a recruitment agency that provides interim managers across the public sector, said: “There is no doubt that the unintended consequences of these changes will be profound for local authorities and other public sector bodies. New assignments for work inside IR35 are already being priced 15-20 per cent higher. Those costs will place an increased financial burden on the public sector and destabilise the recruitment market.”

The reforms affect central and local government, the armed forces, the police, the NHS and Transport for London, among others. It has been speculated that individuals with the choice to work in the private sector may increasingly prefer to do so; tax arrangements in private sector organisations tend to vary greatly between sectors, and there is no equivalent requirement for employers to put all their contractors through payroll, though HMRC may investigate organisations that fail to do so.

The government said it was reforming the IR35 system because it estimated that 90 per cent of the individuals affected in the public sector were not paying enough tax, leading to an annual loss of £400m to the Treasury.

Tax barrister Jolyon Maugham QC said the reforms were likely to prove particularly detrimental to the NHS, by driving up the cost of staffing and discouraging individuals from working for the health service. “[The NHS] is going to have the starkest effect,” he said. “Many doctors and nurses are going to seek to work more in the private sector and that’s going to create a problem in the NHS, which as we know is already struggling to fill positions.”

petition asking parliament to reconsider the issue has so far attracted more than 27,500 signatures. Contractor Gareth Rowell, who submitted the petition, said: “This will severely reduce the income of such individuals but confer none of the rights and benefits of an employee [in traditional employment].”

Nathan Long, senior pension analyst at Hargreaves Lansdown, said fears of a talent exodus were overplayed, pointing out that pay was not always the “sole motivation” when choosing where to work. “While some individuals may shift to the private sector, seeing a reduction in their take-home pay as the straw that breaks the camel’s back, many will have a particular specialism that dovetails well with public sector work or have motivations aside from money,” he said.

Long said there were several alternative ways for contractors in particular to legally reduce the amount of tax that they pay. He said: “We expect to see those who are affected make better use of their company to make pension contributions that will help them save tax efficiently for the future. They should also look to use their ISA allowance, which is being extended to £20,000 per annum from 6 April.”

In addition, the government has developed an online Employment Status Service tool to assist public sector employers in calculating which individuals they will need to start deducting tax and NI contributions from at source. HMRC says this will go live by the end of this week.

An HMRC spokesperson said: “The changes coming into effect from 6 April 2017 only affect people working through their own company who would be employees but for the existence of that company; we expect about 30,000 individuals to be affected.

“There should be little change for people who are already complying with regulations, and their salaries will be unaffected, but workers who are not complying may clearly have to pay significantly more tax. The government is monitoring the impact of the changes to public sector hiring and has not seen evidence of large-scale flight to the private sector.”

The news comes as contingent forms of employment, from agency work to self-employment, continue to grow. Research from the Association of Independent Professionals and the Self-Employed has revealed that freelancers are the fastest-growing segment of the wider 4.8 million self-employed population, and that they contributed £119bn to the economy last year, a rise of £10bn compared to 2015.

There has also been a 66 per cent increase in the number of freelance workers aged between 26 and 29 since 2008.