Umbrella or PSC: What’s better for public sector contractors?

Umbrella or PSC: What’s better for public sector contractors?

26 January 2017

It’s a question that many limited company contractors will be asking in the coming months as impending changes threaten some of the biggest financial advantages that come along with limited company status.

For public sector contractors operating through personal service companies (PSCs) the changes could prove catastrophic.

The big shift concerns the IR35 status of public sector contractors – specifically, who judges a contractor’s IR35 status. From April, the responsibility for judging IR35 status will pass from the individual contractor to the hiring public sector body or agency charged with recruitment.

As a result, more contractors will be ‘caught out’ by the IR35 rules. Anyone ‘caught out’ by the changes will be reclassified by HMRC as being in ‘disguised employment.’ This means they will be taxed as if they were regular employees.

These PSC contractors won’t be able to claim ant of the perks of self-employment, but they won’t receive the benefits of normal employment either. They will miss out on benefits such as:

  • Employment law protection
  • Stability
  • Holiday pay
  • Sick pay
  • Simple taxes

PSC contractors may also struggle to find work. There is already evidence emerging that hiring bodies and recruitment agencies will be unwilling to work with PSC contractors because of the extra administrative burden it places on them.

Earlier this month, Transport for London became the first public sector body to impose a blanket ban on workers operating through their own limited company or PSC.

Moreover, any PSC contractors running businesses with ‘limited costs’ and trading under the flat rate VAT will see their rate increase from April. This will reduce another tax advantage for limited companies.

‘Limited cost’ companies will typically be in the services sector and will purchase few raw materials. 

PSC contractors, switch to umbrella before April

Given the changes detailed above, it’s easy to see why so many contractors are planning to switch to umbrella companies before April. Changes to IR35 and VAT will have an impact for many contractors operating in the public sector.

In order to remove an administrative burden and ensure compliance, many agencies and public sector bodies may be motivated to transfer some or all of their contractors to umbrella schemes.

An umbrella company makes managing your taxes much simpler and it gives you access to certain in-work benefits.

But making the umbrella switch may not be right for everyone. There may be other ways that you can continue trading efficiently as a PSC, but it will depend in a large part on your individual circumstances.

For an individual appraisal and honest advice, contact a member of the umbrella.co.uk team today. Call 0800 121 6513 or email team@umbrella.co.uk