Tax changes for UK public sector agency workers could lead to private sector exodus, warns report

An internal local government analysis has revealed that many frontline contractors could lose up to 30% of their take-home pay.

Forthcoming changes to tax rules affecting self-employed workers in the UK public sector could slash their take-home pay and spark an exodus to the private sector, an internal local government analysis has warned.

According to the Guardian newspaper, the analysis lays out planned changes to the IR35 tax system from 6 April this year. The changes would require public sector employers to deduct tax and national insurance contributions (NICs) from contractors’ pay at source rather than allowing them to defer payments and claim expenses.

As a result, many people who work regularly for the public sector could lose up to 30% of their take-home pay as they will be subject to NICs for the first time. Although the individuals concerned are not being reclassified and will remain as either self-employed or agency workers, the move will affect highly-paid people in frontline services. It will not affect employees on the payroll, however.

But the report warns that the changes could lead to many workers deserting the public sector in favour of private companies, where the revised rules do not apply. It also points to the potential creation of a “two-tier system” that could create a major skills shortage in critical areas.

The government says it is altering existing regulations because it estimates that 90% of the agency workers involved are not paying enough tax, leading to a loss of £400 million each year to the Treasury. It has developed an online tool to help employers work out which agency workers they will need to start deducting tax and NICs at source, but due to problems with it, it has yet to go live.

A petition to Parliament in protest at the issue has so far attracted more than 27,000 signatures. Gareth P Rowell, who submitted it, said: “This will severely reduce the income of such individuals but confer none of the rights and benefits of a staff employee.”