Public Sector IR35 reforms: How are contractors responding?

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Attempts to force contractors into PAYE arrangements haven’t all gone to plan.  There are various ways in which contractors have chosen to respond.

·       Contractors are effectively picking up the new tax bill by accepting new contracts at lower rates.

·       Contractors have increased their rates to compensate for loss of earnings to tax

·       Contractors have declined new contracts and walked away from the public sector. 

Unfortunately, contractors who have accepted contracts on lower rates are the ones in a weak bargaining position.  They have accepted the new terms set out by their clients for lack of a better option. 

On the other end of the spectrum we have the contractors who have upped sticks altogether.  They know there is demand for their services elsewhere where they won’t be subject to punitive taxation.   

How much does your rate need to increase by if IR35 applies?

Occupying the middle ground are contractors who have negotiated higher rates to guarantee the same income after tax.  This is becoming a popular strategy that many PSBs are caving to because they can’t afford to lose out on the critical skills that their contractors provide. 

Speedy has compiled a table to help show how much you would need to increase your rate by to retain current levels of take-home pay.

 Current Rate IR35 does not apply  New Rate IR35 Applies  Increase %
 £100  £118  18%
 £150  £185  23%
 £200  £257  29%
 £500  £650  30%
 £800  £974  22%
 £1000  £1229  23%



Why Contractor rate hikes mean IR35 is a ‘tax neutral strategy’

Despite HMRC’s intention to increase its tax yield, contractor rate increases make IR35 in the public sector a largely tax neutral strategy. 

Contractors increase their rates, more tax is charged and given straight back to HMRC.  Meanwhile PSBs are forking out more for the skills they need whilst contractors end up with the same amount in their back pocket. 

This would be far from the case if the same tactic were applied in the private sector, which could see private sector firms paying a heavy price.  HMRC has insisted that the measures won’t be enforced beyond the public sector though many are convinced a public sector rollout is imminent. 

Despite the taxman’s denial it seems to more a case of when this will happen and not if.    

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