Anyone considering entering the world of contracting will need to understand the difference between the public and private sectors. After all, this will have an impact on what kinds of contracts you take on, what kind of client you will work with, and whether you will be impacted by the infamous IR35 legislation.
To help, Umbrella Broker has put together this guide outlining the key differences between the public and private sectors for contractors and how your decision will impact your career.
Difference between public and private sector
In a nutshell, the public sector is largely controlled by the government, whereas the private sector is controlled by individuals.
To break down the differences further, we will look at each in more detail.
The public sector
As we have mentioned, the public sector consists of bodies and organisations controlled by the government, including the government itself.
Public sector bodies, therefore, receive their funding from the government. For this reason, these bodies must stick to certain rules and regulations that private sector bodies do not. These can be rules at the local level, from local government to international bodies such as the World Trade Organisation.
As public sector bodies are subject to a wide web of rules and regulations, they also face greater scrutiny and accountability to ensure they are meeting their goals and objectives.
This is due to the fact that public sector bodies receive their funding from the government which collects money from the public in the form of taxes. Therefore, the public has a vested interest in what public sector bodies are doing and what they are achieving.
That’s why it is also vital that public sector bodies are transparent and make information available to the public when they ask for it.
The private sector
That’s how the public sector operates, now we will look at the private sector.
Unlike with the public sector, private sector organisations are run by private individuals.
Because of this, private sector organisations are subject to fewer rules and regulations. They are also subject to less scrutiny and accountability as they are not funded by public money.
Private sector organisations may face scrutiny and accountability from shareholders or investors, but the scale of accountability does not usually compare to that of public sector organisations.
Unlike the public sector, whose main aims and goals are to provide social value to the public, private sector firms generally hold a different set of aims and are usually driven by profit and sales.
Finally, private sector bodies are not expected to be as transparent as public sector bodies as they are not held accountable to the public.
These key differences between public and private sectors can have a big impact on what clients contractors work with and the freedom they have once they take on such contracts.
Another key consideration when it comes to the public vs private sector debate is IR35.
What is IR35?
IR35 was initially introduced in 2000 to stop self-employed workers like contractors from operating as disguised employees. In other words, IR35 targets self-employed workers that actually operate more like employees, in order to enjoy the tax benefits of the self-employed.
When IR35 was initially introduced, it applied only to public sector contractors. It was originally the responsibility of the contractor to determine their own IR35 status. However, changes were made in 2017 when it became the client’s responsibility to decide the IR35 status of the contractor. This is because HMRC deemed that too many companies were not IR35 compliant.
These changes led to thousands of public sector contractors paying more in tax and National Insurance than they needed. These contractors were effectively taxed like employees but did not receive any of the benefits of being an employee, such as receiving statutory benefits.
Then, in April 2021, the same rules were rolled out to the private sector.
IR35 in the private sector
From this point, it also became the responsibility of private sector clients to determine the contractor’s IR35 status.
Now, this is leading to thousands of private-sector contractors being badly hit by IR35. Many are now facing stressful, costly, and time-consuming investigations and many will end up paying more in tax and NI than they should.
Time to go umbrella?
In order to avoid IR35, many contractors are now opting to use the services of an umbrella company.
As an umbrella company employs the contractor, they are exempt from IR35, meaning fewer worries, stress, and hassle. This means that contractors can work in either the public or private sectors and not have to worry about IR35 investigations.
What’s more, an umbrella company offers the contractor a range of additional benefits.
For example, the umbrella company processes the contractor’s salary through the PAYE tax system. This means that the contractor’s tax obligations are always up to date and taken care of.
What’s more, it means that contractors don’t have to worry about filing for self-assessment which can be difficult and time-intensive.
An umbrella company also offers the contractor statutory rights. These include paid holiday leave, sick leave, maternity leave, paternity leave, and a workplace pension.
