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Revealed: the true cost of ending limited company contracting in the public sector

Revealed: the true cost of ending limited company contracting in the public sector

“The government looks set to sleep-walk the public sector into a financial and skills crisis that could rip through the Chancellor’s forthcoming Budget predictions and wreak havoc on the professionalism of the civil service.”

That’s the stark warning from ContractorCalculator CEO Dave Chaplin, a masters-level mathematician who has & lsquo;run the numbers’ to reveal the true cost of what he calls the government’s witch-hunt of limited company contractors.

He has calculated that the added cost of forcing such contractors to work as public sector employees would be between 13 and 20%. “But the financial costs would be outweighed by the more likely results that limited company contractors would simply remove their skills from the public arena, and instead only supply their services to the private sector,” said Chaplin.

“A brain drain is the grim prospect facing the public sector as the government witch-hunt for limited company contractors continues. With cabinet members and the Treasury vowing to end the perfectly legitimate and mutually beneficial right of contractors to work for the public sector, the true victim is likely to be the taxpayer,” he added.

Highly skilled and mobile limited company contractors who are forced to transition into public sector employment, and therefore see their take-home pay reduce, will either need to be paid more by the public sector or will switch to the private sector.

Claimed tax savings are simply incorrect – limited company contractors are “a bargain for the taxpayer”

Chaplin bases his argument on real-life scenarios he has calculated and his analysis of the recent case of interim management contractor Paul Brown. A report by Rajeev Syal in the Guardian revealed that Brown was recently terminated from his assignment with the Office for Nuclear Regulation (ONR) at the Health and Safety Executive (HSE).

The table below analyses three scenarios of Brown’s hypothetical financial profile, based on the information in the Guardian article and documents publicly available about his company, Operations Improvements Limited:

1.      Brown’s financial profile delivering his services on the HSE

assignment via a limited company trading model – an &pound8,000 salary and &pound3,000 expenses per year is a reasonable assumption for a contractor limited company of this type

2.      Brown’s financial profile if his professional fees were annualised

into a &pound145,000 salary paid as if Brown were an employee paying income tax under Pay As You Earn (PAYE)

3.      Brown’s financial profile if his client, HSE, were to pay a gross

salary that would result in the same take-home pay as trading via a limited company

4.      Brown’s financial profile if HSE only paid &pound145,000 and the payroll

tax, employer’s National Insurance Contributions (NICs) were deducted from Brown’s remuneration.

 1. Limited company









&pound145,000 gross fee income

&pound8,000 salary

&pound3,000 expenses

&pound145,000 gross salary (employment income)

&pound154,296 gross salary (employment income)


Gross salary (employment income)

Corporation tax


Income tax (PAYE)





Employee National Insurance Contributions (NICs)





Employer National Insurance Contributions (NICs)





Income tax (dividend)


Cost of tax to individual


33% of &pound145,000


39% of &pound145,000


39% of &pound154,296


39% of


Income after taxes


[salary plus dividend]




Cost to government





Total tax to HMRC





“What is clear is that Brown does not save tens of thousands of pounds because he trades via a limited company,” said Chaplin. “If you consider that limited company contractors receive no paid holidays, pension, death-in-service benefits, perks and the employment rights most workers take for granted, the approximate &pound5,000 advantage Brown receives over an employee being paid a gross salary the equivalent to his professional fees seems like a bargain for the taxpayer.”

PAYE costs the government more, but with no benefit to taxpayers

If Brown was employed by HSE and paid a salary such as in scenario 2 above, rather than charging fees for providing his services via a limited company, then his earnings would fall by around &pound500 a month and his expenses would substantially increase, because they would be paid personally and not by his limited company.

Conversely, if HSE agreed to match his take-home pay with a commensurately higher salary, as in scenario 3, then the cost to the public purse would be just short of &pound30,000 a year higher.

Another option would be for HSE to maintain its &pound145,000 budget and insist that Brown’s employer’s National Insurance Contributions (NICs) are included in that figure. This scenario is shown in column 4, and Brown would take a pay cut of over &pound1,100 a month.

According to Chaplin, abolishing the limited company model is a & lsquo;lose-lose’

for the government: “The government appears to be presenting limited company contractors with two options: termination or moving onto a fixed-term employment contract.  Talent is going to walk!”


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