Public sector cuts could be good for both contractors and the public sector itself. The Comprehensive Spending Review (CSR) announced last month by the Coalition government may have a lasting and positive impact on the UK’s currently bloated public sector – improving how it is run, reducing what it costs and increasing its quality of service delivery.
There could be also be a positive impact on the contracting sector, providing a stream of new work, a new pool of skilled workers with different expertise to bring to the contracting table and the opportunity for more altruistically oriented contractors to contribute to the greater good.
How did I work that out? Well it largely comes down to economics and practicalities. The economics are that the public sector has to do more with less, and what there is less of is largely money. The practicalities are that, despite cutting the public sector workforce by around half a million people, there are still jobs that need doing that won’t in future have an employee on the official headcount to do them. That’s where contractors will be able to step in to help.
This is a conundrum that has been faced and largely mitigated by the private sector for some decades. Revenues are down and so, to achieve targets, headcount must be frozen but not at the cost of product/service delivery, because then you aren’t paid. What’s the answer? Use an off-balance sheet resource, by hiring flexible workers who stay off the books and generally meet the same need, often more efficiently, and without adding to the employee payroll.
But according to many permanent employees and managers who don’t know any better, contractors are expensive and so this is a false economy? Well, as the private sector knows so well, that’s not the case when you dig deeper into the numbers. Take a public sector employee earning £50,000pa in a specialist role. When you take into account employer’s National Insurance Contributions (NICs) and other costs of employment – things like a pension, allowances for sick pay, holidays and so on – this employee actually costs the state around £60,000 to employ. If you use ContractorCalculator’s PAYE/NI Net Salary Tax Calculator, you’ll see that results in the employee receiving net pay of £2,984 a month.
Now, in situations like this, there are two possible scenarios involving contractors – one to benefit the workers and one to benefit the state. If the public sector that has been spending £60,000 on an employee chooses to spend that £60,000 on a contractor who is outside the IR35 regulations, then using ContractorCalculator’s Contractors calculator you arrive at the following eye-opening figures:
Scenario 1
- Contractors rate is £36 per hour, for 44 weeks per year, 37.5 hours per week (day rate is approximately £270)
- The contractor’s gross annual revenue, and cost to the state, is £59,400
- Deducting average company expenses of £11,291 results in a profit of £48,108
- Total taxes are £12,378, which is 20% of company revenue
- The contractor’s net annual income is £44,021, and net monthly income is £3,668
- To earn the same via permanent employment would require a salary of £63,915.
The contractor has a net income of £700 greater than the permanent employee, and the state potentially pays less as there is no weighting for costs like long-term sick leave. That’s a win-win for all concerned, including taxpayers who are getting the same, or better, for less.
Scenario 2
Turning the sums around, and what may be of much greater interest to public sector managers is that to give the contractor the same net income as the permanent employee costs much less:
- A daily rate of £216 makes the contractor’s gross annual revenue, and cost to the state, £47,520
- Deducting average expenses of £11,291 results in a ‘profit’ of £36,228
- Total taxes are £8,454, which is 17% of the contractor’s company revenue
- Net annual income is £36,065, and net monthly income is £3,005
- To earn the same via permanent employment would require a salary of £50,430.
So, it is possible for the state to get the same services delivered for much less money, and it is possible for workers to do the same job and get paid much more for it.
Whilst many organisations would object to the above scenario as being overly simplistic and undesirable, the fact remains that hard choices still remain to be made by the public sector. And contractors offer a genuine option to maintain delivery at the same time as cutting costs. Many areas of the public sector already recognise the benefits of flexible workers, like contractors, and embrace them enthusiastically. The challenge is for those parts of the state machinery yet to see the light to recognise the CSR for the potential it offers, turning a threat into an opportunity, and the loss of funding into a win-win.