Tax changes to be introduced in April could see hundreds of thousands of public sector workers lose up to 30% of their salary, sparking an exodus from already struggling sectors such as social care and the NHS.
According to internal local government analysis seen by the Guardian, planned changes to the IR35 tax system could see agency workers supporting frontline government services lose up to 30% of their take-home pay.
The documents warn that the reforms could lead to many of these workers deserting the public sector in favour of private employment, where the changes will not apply. Experts add that councils may have to fork out additional pay to prevent staff from leaving crucial roles after the changes are introduced on 6 April.
The IR35 changes do not affect employees on the payroll but will apply to agency workers in the public sector, including those in the NHS, councils, armed forces, police, Transport for London, schools and further and higher education establishments. The tax changes will not apply to the same workers doing the same or similar jobs in the private sector.
Local government analysis seen by the Guardian expresses alarm about the changes, warning that the new “two-tier” system could lead to many workers terminating work for the public sector and creating a major skill shortage in critical areas.
Jolyon Maugham QC, a leading tax barrister, expressed alarm at the consequences of the changes: “I was told by a very senior Treasury source that the government wouldn’t have got the proposals across the floor of the house if they introduced them for the private sector too. This change is going to have the effect of driving up costs in the public sector.
“The area where this is going to have the starkest effect is the NHS. Many doctors and nurses are going to seek to work more in the private sector and that’s going to create a problem in the NHS, which as we know is already struggling to fill positions.”
The IR35 tax system, introduced in 1999, is to be changed to require public sector employers to subtract tax and national insurance contributions from agency workers’ pay packets at source rather than allowing these workers to calculate their own tax contributions.
The government says it has introduced these changes because it estimates that 90% of these agency workers are not paying enough tax, leading to a loss of £400m a year to the Treasury.
A petition to parliament protesting about the issue has so far attracted more than 27,000 signatures. Gareth P Rowell, who submitted the petition, said: “This will severely reduce the income of such individuals but confer none of the rights and benefits of a staff employee.”
Neil Lupin, managing partner of Green Park, a recruitment agency providing interim managers across the public sector, said: “There is no doubt that the unintended consequences of these changes will be profound for local authorities and other public sector bodies. New assignments for work inside IR35 are already being priced 15-20% higher. Those costs will place an increased financial burden on the public sector and destabilise the recruitment market.”
Alex Cobham of the Tax Justice Network said: “This looks like the worst kind of populism by government. It has been badly done and badly targeted. It is not likely to make the tax system fairer and may have adverse consequences. It seems misguided and it is difficult not to think it’s politically motivated.”
An HM Treasury spokesman said: “It’s fair that two people doing the same job should pay the same taxes and these reforms will help ensure that contractors pay the correct tax.”
The government has developed an online tool to help public sector employers calculate which agency workers they need to start deducting tax and NI contributions from at source. However, there have been problems with it and it has not yet gone live.
The spokesman declined to comment on why the tool was not yet available. He also declined to comment on whether or not the government had done any assessment of the implications for public sector budgets and workforce of these changes.