IR35 tax reforms make IT contractors leave public sector

 In Bookkeeping, Contractors, Tax

Recent IR35 tax reforms are having a drastic effect on the take-home pay of public sector IT contractors. Many are now choosing to ply their trade elsewhere.

Here, we’ll take a closer look at the reforms. We’ll also explore how they are affecting IT contractors, and what these contractors can do to maintain profitability.

What do IR35 tax reforms mean for IT contractors?

In total, 71% of public sector IT contractors are losing anywhere up to 25% of their take-home pay as a result of the IR35 tax reforms.

Just under half of the 1,000 contractors surveyed by CW Jobs believe these tax reforms have caused IT contractors to leave the public sector. Two-thirds believe the scale of this exodus will have a knock-on effect for project delivery.

The IR35 tax reforms came into force this April. They effectively mean that public sector IT contractors are taxed directly, in the same way as full-time employees. However, they remain unable to access the typical benefits of a full-time worker, such as sick/holiday pay and pension contributions.

Under the new rules, income tax and National Insurance are deducted from contractors’ invoices, then paid via payroll in the same way as for PAYE employees. Invoices and payroll are then reconciled to avoid double taxation, and the contractor doesn’t pay corporation tax on the payroll figure.

The new rules were made official in last year’s Autumn Statement by Chancellor Philip Hammond. This was despite the proposition receiving widespread criticism (including from The Treasury) during the consultation.

Even though these reforms were only introduced this year, the Government may soon have to re-consider its position.

47% of respondents warned that the public sector is already lacking in terms of digital skills. In addition, one-third of public sector clients have already had to increase their rates to remain attractive to IT contractors.

Tax reforms makes monitoring finances even more important

With these IR35 tax reforms putting the squeeze on IT contractors, keeping a close eye on incoming and outgoing costs is more important than ever.

To achieve this without dedicating an excessive amount of time to financial administration, IT contractors should think seriously about adopting advanced accountancy software.

Programs like FreeAgent and Xero can automate a host of processes to keep IT contractor records accurate and up-to-date, including:

  • Estimate creation
  • Time tracking
  • Invoice payment processing
  • Project-specific cost and profit logging
  • Corporation tax forecasting

IT contractors can even give a specialist accountant real-time access to these programs. This enables them to make timely interventions and provide advantageous advice when it matters most.

By keeping track of financial movements using software and a specialist accountant, IT contractors can optimize their chances of staying profitable. They can also assess whether working for the public sector remains their best option.

Find out more about how to make advantageous financial decisions in a challenging market by calling on the experts at 3 Wise Bears. Alternatively, find out more about our contractor accountant services.

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