New Rules for Contracting in the Public Sector
What You Need to Know
New rules are being introduced which affect contractors who work in the public sector. If you fulfil a contract for a public sector organisation through your own personal service company (PSC) you may soon have income tax and National Insurance deducted at source before your PSC gets paid, resulting in higher deductions and less take-home pay.
New off-payroll contracting rules come into effect on 6th April 2017 and apply to public sector bodies as defined by the Freedom of Information Act 2000 and Freedom of Information (Scotland) Act 2002, such as the NHS, the education sector, police and local authorities, among others.
It’s part of the Government’s Finance Bill 2017 which aims to reform the intermediaries legislation, more commonly known as IR35. Announced in the Autumn Statement, the Government hopes the change will generate £25m per annum for the Treasury.
Until now, responsibility for validating IR35 status rested with you as the contractor. However, public sector organisations or recruitment agencies that find your PSC work within the public sector will now be responsible for determining whether this is the case. They will need to use HMRC’s new online employment status tool, which many commentators believe is more likely to result in more PSCs being treated as being caught by IR35 rules.
It is the organisation which pays your PSC that will need to account for and deduct PAYE and National Insurance.
The new rules come into effect on April 6th 2017 and may apply to contracts which were entered into (and possibly completed) before that date. They also apply if work is completed before the deadline but payment is made on or after April 6th 2017.
Public sector bodies should review all contracts and notify you if tax and National Insurance contributions will be deducted at source.
The impact on you – the contractor
- Potentially less take-home pay
Using the online employment status tool may result in your way of working being classified as inside the scope of IR35, in circumstances where you may have come to a different conclusion. Where that is the case, tax will be deducted at source, when previously it would not have been and your take-home pay will reduce as a result.
- Lack of access to employee rights
While you will be treated like an employee from a tax and NIC point of view, you will not have the benefit of statutory payments, stakeholder pensions and other employment rights you would receive as an actual public sector or umbrella employee.
- Potential need to make fee increases
You may need to raise your fees to cover the additional costs, though this is unlikely to be a straight-forward process as other contractors who do not alter their fees may be more appealing to cash-strapped public sector organisations.
- Reduced contractor opportunities
The additional administrative burden may mean public sector organisations are less forthcoming in offering contractor roles.
If the new rules apply to you, there are a number of options you can consider
- Take no action, accepting the possibility of lower take-home pay
- Seek contracts in the private sector only
- Join an umbrella company where you will still be subject to PAYE and National Insurance deductions but able to receive employee benefits
- Raise your fee to preserve your current after tax position
Using an Umbrella Company
Why Become an Umbrella Employee
- Employment rights
As an ‘employee’ you are entitlement to benefits such as sick pay, maternity pay, paternity pay, adoption pay and pension provision
- Payment is made promptly
Unlike a PSC no need to raise invoices or chase payments
- Business expenses
Dependent upon the outcome of checks to assess levels of Supervision, Direction & Control and whether you qualify as a ‘Multi-site’* worker you may be eligible to claim business related expenses.
- Ease of use
You simply submit time-sheets and expenses (where applicable). Your tax, NI and any other lawful deductions (e.g. repayment of student loans, child support orders) will be processed by us.
In addition to the legal requirements of Professional Indemnity, Public Liability & Employer’s Liability insurance a few umbrella companies, including Crest Plus, also offer Personal Accident Cover
*As a Multisite worker, expenses can be paid tax-free if you work at temporary workplaces, for the same end client, as part of the same engagement.
Why choose Crest Plus as your umbrella company?
- Peace of Mind – all tax and NI automatically deducted
- Statutory Benefits – enjoy the protection of being an employee
- Pension Scheme – making provisions for your future
- Expenses – entitled to claim legitimate business expenses
- Prompt payment – daily payroll runs to allow same day payment into your chosen bank account & SMS message to confirm payment is on the way
- Flexibility – suitable for all length of assignments and intermittent contract work
- Insurance – comprehensive personal accident insurance on all assignments
- Online Portal – 24/7 expenses submission and ability to view payslips
- Unlimited access to our experience Relationship Team- real people with loads of experience helping contractors
- Fast set-up to allow you to begin contracting without delay
- No set-up fees or minimum tie-in period
What to do next
If you think your contract is affected by the new legislation, please get in touch on 01244 684700. Our expert team will be able to help you determine the impact on your take-home pay and the best course of action to take to protect your income. If you are thinking of moving to an umbrella organisation they will also be able to provide more information on our Umbrella Plus proposition.