There are many decisions contractors have to make during their careers, from whether they will charge daily or hourly rates, whether they will work through a limited company, PAYE or umbrella to whether they will work in the public or private sector.
Choosing between the public or private sector can make a big difference to a contractor’s career, determining everything from the types of contracts they will work on, who they work with to whether they will fall under IR35.
This is especially true in 2021 as upcoming reforms to the legislation come into motion from April 6th which are set to impact thousands of contractors.
To help every contractor make the best decision for them when it comes to public vs private sector, Umbrella Broker has put together this handy guide outlining the key differences and the IR35 implications of each.
Public vs private sector: What’s the difference?
The public sector lies under the control of government, whereas the private sector is run by individuals and businesses who make a profit.
Therefore, there are naturally key differences between the two sectors. These include:
Goals
Public sector
As public sector organisations are directly linked to government, their objectives are typically driven by compulsory regulations from local, regional, national or international organisations or bodies.
Private sector
Private sector bodies on the other hand are not subject to the same kinds of regulations as they are private entities. This means private sector organisations generally have more freedom and flexibility over how they operate and what objectives they have.
As these bodies are free to establish their own goals they are usually (but not always) financially driven around revenue generation, which isn’t the case with the public sector.
Transparency
Public Sector
As public sector organisations are controlled by government they should be transparent, open and honest. They are expected to release key information on what they are doing and what they are achieving to ensure they are on track.
Private sector
This isn’t the case for private sector bodies, however, which often can hold back information if they wish.
Spending
Public Sector
The final main difference between the public vs private sectors is spending.
Whereas public sector bodies are held accountable to several parties interested in how they are spending their money, private sectors are not and usually don’t face the same level of accountability and scrutiny.
What does this mean for contractors?
Although this can have an impact on contractor’s day to day lives, the main difference between the public and private sectors which will affect contractors is IR35.
What is IR35?
IR35 is a piece of legislation that was introduced in 2007 to stop workers like contractors from operating as ‘disguised employees.’ This means preventing workers from offering their services in a way that allows them to pay less tax and National Insurance.
Changes to the legislation were implemented in 2017 when the responsibility to determine a contractor’s IR35 status shifted to the client rather than the contractor themselves, but this only applied to contracts in the public sector.
This meant that if the contractor was found to be inside IR35, the client was responsible for deducting the contractor’s tax and National Insurance contributions from their fee before it was paid to them.
The bad news for many was that thousands of public sector contractors were wrongly classified as being inside IR35, regardless of their actual circumstances, and paid more in PAYE tax and National Insurance as a result. Although these contractors began to pay tax as an employee would, they did not receive the benefits employees are entitled to, such as statutory rights.
IR35 in the public vs private sectors
The bad news for the 170,000 private sector contractors is that from 6th April 2021, these rules will also be rolled out to private sector contracts.
From this point, it will be the client who will be responsible for determining the contractor’s IR35 status in the private sector, which could lead to thousands paying more in tax and National Insurance contributions.
What’s more, many larger private sector clients have now ruled out working with contractors altogether to avoid getting caught up in stressful, often time consuming IR35 investigations.
Although many contractors are understandably worried about upcoming reforms, there is one way to avoid getting caught out by IR35 – by operating under an umbrella company.
Why use an umbrella company?
As an umbrella company takes the contractor on as their employee, they are automatically exempt from IR35 legislation.
This can take much of the stress and worry away from the contractor, whilst also offering them a wide range of other benefits.
Whether you choose to work in the public or private sector, the umbrella company will take care of invoicing the client and chasing payments, will give the contractors statutory benefits like sick pay, paid holiday leave, a workplace pension and maternity/paternity leave, and will take care of other admin and paperwork tasks.
It’s no surprise that operating through an umbrella company is widely considered the easiest and most hassle-free way to contracting.
If you have decided that it’s time to go umbrella in light of upcoming IR35 reforms, Umbrella Broker can help you find the best umbrella company for you.
