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Employers: The Cost of Putting Staff 'On Payroll'

The current political storm about the number of senior civil servants who are not being paid ‘on payroll’ but are remunerated by either service companies or employment agencies – Civil Servants ordered to justify off payroll arrangements is one that in all of its furore is being widely and seriously misunderstood. The revelation that over 2,000 government employees who have been paid more than £58,200 through these alternate arrangements have got the Government, MPs and interested bodies such as the Taxpayers’ Alliance very hot under the collar and demanding that these arrangements must come to an end. However, whilst it seems clear that these individuals benefit from reduced taxation by being engaged via service companies, little consideration seems to have been given that one of the reasons these arrangements have continued is that they are significantly cheaper and offer better value for money for employers- in this case the Government which means you and me as taxpayers.

By being engaged (rather than being employed) through this arrangement, it does mean that the employer does not have to pay other the employer’s National Insurance Contribution (NIC) nor pension contributions. In addition, it is unlikely that holiday or sick pay is paid either. If you look at a worked example of employing these people by putting them on the payrolls it can be seen that an employer would almost certainly be far worse off:

  • Fee paid via service company arrangement: £58,200
  • Salary paid on payroll: £58,200
  • Employer’s NIC (13.8%): £ 8,032
  • Employers pension contribution (15%): £8,730
  • Total cost per person £74,962

This suggests that for each of the 2,000 people engaged via service companies or other agencies that the additional cost of putting them ‘on payroll’ could be as much as £16,762 or a total of £33 million, and this is almost certainly an under estimate as it assumes that the average fee paid is £58,200 and the pension contribution is based on an average figure paid by a number of large private sector companies, when for the public sector it is likely to be much higher. In addition, as an employee these individuals would also be liable for redundancy payments if their services were no longer required whilst being engaged through a service contract would probably not require any termination payments as the contract would just not be extended and be cancelled on its expiry. It’s true that these individuals would almost certainly then have to pay the full tax liability rather than at the corporation tax level but the potential additional cost to the government and tax payer would substantially out weigh that, which is why, I suspect, the HM Treasury solution to this issue is to seek assurances from individuals that they are paying the same amount of national insurance and income tax as an employee or face the consequences of contracts being cancelled or host government departments being ‘fined’. The lesson that employers can take from this is that whilst there is a reputational issue about some people enjoying tax benefits, the cost of ensuring that all ‘staff’ pay the same income tax is likely to hit their bottom line and profits.