Public or Private Sector: Will you be impacted by IR35?

IR35 in the public and private sector

To help every contractor navigate the sometimes confusing world of IR35, in this guide, Umbrella Supermarket outlines the differences between the public and private sectors and how this will determine whether you will be impacted by IR35.

Public vs Private Sector: What are the key differences?

Whereas the public sector lies under the control of government, the private sector is run by individuals and businesses who make a profit. This leads to several key differences between the two sectors, including:

Objectives and motivations

The public sector’s objectives and motivations are influenced and directed by compulsory regulations, whether that be from local, regional or national bodies and organisations.

However, private sector organisations are not subject to such restrictions. This means that these organisations have the freedom to set their own objectives and motivations. As the private sector consists of individuals and companies, this usually means that their goals are financial and revenue-centric.

Spending and finances

Another main difference between the public and private sector is their spending. As we have mentioned, as the public sector is accountable to several parties that are interested in how they are spending their money and performing, however the private sector isn’t subject to such restrictions. This means the private sector is largely free it spend its money as it wishes.

Transparency

Finally, the two sectors differ in how transparent they are expected to be. After all, as public sector organisations are under the control of government, being open and transparent is of the utmost importance. These organisations must share key information on what they are doing and achieving when asked to disclose it.

Again, however, private sector bodies are not subject to such strict standards. As private businesses and organisations, they can often hold back information if and when they wish.

Those are the main differences between the public and private sectors, so what impact does this have on contractors?

When it comes to the public and private sectors, the main difference that can have a big impact on contractors is how they will be impacted by IR35.

What is IR35?

IR35 legislation initially came into play in 2000. It was introduced to stop workers like contractors operating as ‘disguised employees.’ In other words, it was designed to stop workers offering their services in a way which allowed them to avoid paying tax and National Insurance.

Under the legislation, it was the responsibility of the contractor themselves to establish their own IR35 status.

However, this changed when HMRC deemed that too many companies were not compliant. As of 2017, in the public sector, it became the responsibility of the client to determine the contractor’s IR35 status.

IR35 in the public sector

When this change was rolled out to the public sector, it meant that many contractors were deemed to be inside of IR35, regardless of their actual circumstances.

This meant that it became the client’s responsibility to deduct the contractor’s tax and National Insurance contributions from their fee before it was paid to them.

The problem here was that public-sector clients weren’t always accurate in their assessments. This led to many contractors paying more in PAYE tax and National Insurance Contributions than they needed to, having a damaging knock on effect to thousands of contractors.

IR35 in the private sector

Although IR35 originally only applied to the public sector, as of April 2021, it is set to be rolled out to the private sector too. Although this was originally meant to come into play in April 2020, it has since been delayed due to the COVID-19 pandemic.

From this point onwards, it will become the responsibility of the client to determine the contractor’s IR35 status, meaning many of the 170,000 limited company contractors are set to be badly impacted.

So, although contractors can currently avoid IR35 by working in the private sector, as of April next year this will no longer be the case.

How to comply with IR35

Inevitably, many contractors that currently work in the private sector are feeling anxious about these changes. After all, it may mean they end up paying more in tax and National Insurance than they need to. What’s more, many larger clients have stated that they will simply stop using the services of limited company contractors altogether.

If you are in a similar boat, there is a way to ensure compliance with IR35 – by working through an umbrella company.

An umbrella company makes the contractor their employee, in turn putting them on their payroll, processing their salary and tax through PAYE and giving them statutory benefits such as holiday pay and sick leave.

As well as offering the contractor these range of benefits, they also have the key advantage of making the contractor exempt to IR35 since they are technically an employee.

Let Umbrella Supermarket help you find the best umbrella company for you

Contracting through an umbrella company has become an increasingly popular way for contractors to operate, combining the benefits and security of employment with the freedom and flexibility of being self-employed.

What’s more, as changes to IR35 prepare to come into motion from next year in the private sector, there’s never been a better time to consider working through an umbrella company.

If you have decided this is the right path for you, the next step is to find the best umbrella company for you.

That’s where our umbrella calculator comes in handy. In just 2 minutes, we help you find the best umbrella company based on your needs and requirements. So, whether you are looking for more money or help with things like childcare credits, we are here to help.

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