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Over 50s and IR35: How retired IT workers could help close the tech sector skills gap

With the UK government wanting to get more people who took early retirement in the wake of the pandemic back to work, recruitment experts ponder if encouraging them to work on a freelance basis could close the IT sector’s skills gap

Caroline Donnelly
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Published: 06 Mar 2023 15:45

The UK economy is clearly still feeling the effects of the Covid-19 lockdowns, with government figures showing the number of economically inactive people in the workforce has risen markedly since the onset of the pandemic in Spring 2020.

The government defines someone as being “economically inactive” if they are out of work and not actively seeking new employment, and – while the number of people that fit this category has fallen in recent months – getting more of them back to work remains a top priority.

“The rise in economic inactivity makes it harder to control inflation; damages growth and puts pressure on already-stretched public finances,” said Lord Bridges of Headley, who chairs the House of Lords Economic Affairs Committee, which published a report on this topic in December 2022.

Its findings pinpointed the high number of people in the 50 to 64-year-old age bracket who retired early in the wake of the pandemic as being “the biggest of four factors” that have made it harder for employers to fill the 1.1 million job vacancies that currently exist across the UK.

“Increasing sickness; changes in the structure of migration; and an ageing UK population, whose impact was previously concealed by other trends, have also contributed,” the Committee stated.

From an IT market perspective, the technology sector is in the grip of a well-documented and ongoing skills crisis, with the datacentre industry, for example, feeling the effects of its workforce ageing into retirement acutely.

Is the government right to be targeting the over-50s?

While the government views getting the over-50s back to work as the main way to bring down the number of people classified as being economically inactive, a February 2023 report by consultancy LCP accused ministers of “barking up the wrong tree” with its approach.

This is because LCP’s research, based on the government’s own data, suggests the rising number of economically inactive people is due to large portions of the population being unable to work because they are in poor health.

“Policy solutions which aim to reduce early retirement or to encourage the retired out of retirement are likely to have only limited effect in reversing recent trends,” said LCP partner Steve Webb.

“Instead, the policy effort needs to be focused around understanding why flows into long-term sickness have grown and on early intervention to prevent people’s health from deteriorating.

“Without action there is a risk of a growing core of people stuck in long-term receipt of sickness benefits, with limited prospect of returning to paid work and damaged prospects for retirement,” he said.

The report points to figures published by the government’s Office for National Statistics (ONS), which show there are fewer people of working age who are retired now than there was at the start of the pandemic.

The ONS data shows there are just under nine million economically inactive people in the UK, and the number of people that are classified as such has risen by 516,000 since the Covid-19 pandemic.

However, the number of retired people in this group has fallen by 15,000 during the same time period, from 1,122,000 just before the start of the pandemic (during the three months to February 2020) to 1,107,000 during the three months to December 2022.

“This change in inactivity in recent years primarily reflects the higher prevalence of long-term sickness as the main reason for inactivity,” the ONS stated, in its most recent economic inactivity report, which dropped in December 2022.

“Our analysis shows that while this increase in long-term sickness had taken place before the coronavirus pandemic, it has picked up more quickly following the pandemic,” it added.

“There has been a higher incidence of other health problems, which would cover similar conditions to long Covid and mental illness over this period.”

And while many enterprises are in the throes of modernising their IT estates, there are others which – for regulatory and cost reasons – need to maintain legacy systems, and are encountering difficulties when trying to find staff with the talent and knowledge needed to do so.

“The over-50s IT professionals that have become inactive as a result of early retirement will have a direct impact on the IT skills shortage,” John Lynes, managing director of IT recruitment agency Ashdown Group, told Computer Weekly.

“Those that have chosen to retire in this demographic are likely to have been the highest skilled and best paid, [and] their departure further exacerbates the hiring difficulties we are seeing in an already-challenging IT job market. 

“Furthermore, their knowledge and experience won’t be easy to replace as it’s likely to have been built up over decades,” he said. “The knock-on effect of a further depletion in available tech talent is likely to be seen in the ability to deliver against the IT projects in the year ahead.”

Lynes’ words serve to highlight how the IT sector could benefit from the government’s commitment to luring the over-50s out of early retirement, but – as acknowledged in the committee’s report – doing so will be a struggle.

“The majority of those over 50 who have left the workforce since the pandemic neither want nor expect to return to work. Furthermore, most appear reasonably well-off,” the report stated, on account of the fact they may have managed to save a significant amount of money to live off during the pandemic.

“Although this group may yet feel the full impact of the cost-of-living crisis, it would be unwise to proceed on the basis that a significant proportion of those who have exited the labour force since 2020 will come back – or be persuaded back.”

Read more about the impacts of IR35

On this point, Lynes broadly agrees, but he is also of the view that the over-50s could be persuaded to come out of retirement if they are able to find employment opportunities that allow them the flexibility to work as much or as little as they like, and take on contracts that match exactly what they want and are willing to do.

“When you’re trying to get highly skilled, highly paid people back to work, who probably have managed to pay off their mortgages and other overheads, the only way you are going to achieve that is by allowing them to work on their terms,” he said.

“A lot of people’s priorities changed in the wake of the pandemic, and after two years living and working at home, a lot of people decided they wanted more of that life and more of a work-life balance. Getting them to go back to work has to be worth their while, and that means rewarding work that is flexible, too.”

One way they could achieve that is by returning to work as freelance IT consultants, but concerns about falling foul of the government’s complex IR35 tax avoidance legislation may prove off-putting for some – particularly contractors who may have taken early retirement and left the market ahead of the government rolling out reforms to how the IR35 rules work in both the public and private sector in April 2017 and April 2021, respectively.

In the lead-up to the private sector IR35 reforms coming into force, Computer Weekly heard from several IT contractors who said the incoming changes had convinced them to take early retirement owing to concerns about how enterprises were adapting their hiring processes in preparation.

Shifting responsibility

The reforms ushered in changes that meant responsibility for determining how contractors should be taxed shifted away from contractors and onto the end-user organisations that hired them.

This meant that all medium-to-large companies in the private sector would now be responsible for individually assessing every contractor they engaged with to ascertain if the work they did and how it was performed meant they should be taxed in the same way as permanent employees (inside IR35) or off-payroll workers (outside IR35).

As documented by Computer Weekly in the run-up to the reforms a number of private sector firms responded to this shift in responsibility by introducing hiring bans that prohibited the engagement of contractors completely or declared all of the contractors they used were working inside IR35.

In both instances, these strategies were employed to reduce the administrative burden the reforms placed on these firms.

For the contractors on the other end of these hiring strategies, it became more difficult to find work – or meant they were not subject to a fair, accurate or individual assessment of their employment status, as per HMRC’s IR35 guidance. As a result, the prospect of having to grapple with IR35 again is not one many contractors will warmly welcome, Dave Chaplin, tax compliance company IR35 Shield, told Computer Weekly.

“The UK economy and UK plc could benefit hugely from the middle-aged army of professionals, and it would be great if they could be unleashed in a flexible way, to help oil the wheels of the industry,” he said. “But alas, the legislative sludge created by the flaws within the off-payroll legislation, put into force by the Conservative government, has hampered such a move.

“Firms are now reluctant to hire professional contractors who work via limited companies, and are instead pushing them into using umbrella [companies]. This results in a contractor’s earnings being subject to two lots of national insurance and pay-as-you-earn (PAYE) [deductions], with an effective tax rate which can exceed 50%. If firms want to access flexible expertise, the most cost-effective way at the moment is for them to offshore the work, and leave the UK contractors on the bench, or the golf course.” 

Compliance plans

Paul Lloyd, group sales director at contractor accountancy and umbrella services provider Brookson, has a slightly different take on how receptive end-hirers might be to engaging contractors, now the reforms have had a bit longer to bed in.

To this point, he told Computer Weekly that his company has detected some definite shifts in how enterprises are looking to comply with the IR35 legislation in recent months.

These include a reversal of the blanket bans, that prohibited the hiring of contractors, or companies embarking in a complete overhaul of their compliance procedures because their previous approach has made it harder for them to attract the tech talent they are looking for.

“Brookson is doing [IR35 compliance] reviews for hundreds of clients, and we are starting to see a number of them reassessing what they’ve done,” he says.

“They might have rushed and used something like the HMRC-issued Check Employment Status for Tax (CEST) tool a year ago, and previously tried to manage it all themselves in-house ... but now they’re struggling to recruit or get contractors at the right price, and they’re looking through their IR35 process to see if there is a better way of doing that. We are definitely starting to see some clients rethink their approach.”

Something else that might also work in the favour of any contractors considering coming out of retirement is that, based on the trends Lloyd sees in the market, it does tend to follow that the more skill and experience a contractor has, the more likely they are to be classified as working outside IR35.

He added: “Returning to work means these contractors can help address the skills gaps, but they should also consider looking for opportunities to freshen up and build on their existing skills through further training to give them an even better chance of being put to work in a more senior role.”

Knowledge of legacy systems

In some cases, though, retired IT contractors returning to the jobs market are finding there are firms out there that are happy to offer them an outside-IR35 contract and pay them top dollar because of the knowledge and experience they already have of existing, legacy systems.

That’s according to Matt Collingwood, managing director of IT recruitment consultancy VIQU, who told Computer Weekly that his firm has recently placed a Cobol CICS developer in a £850 per day role who initially retired in 2014. Back then, this individual was commanding a £375 day rate.

The IT contractor's view

David Clayton is a 60-plus year-old IT contractor who has not taken on a single assignment since before the start of the covid-19 coronavirus pandemic.

He decided to turn his back on IT contracting after becoming disillusioned by the short supply of outside IR35 roles being advertised and now runs a small handyman firm through his limited company instead.

“I did months of voluntary handyman stuff, and there was no stress involved and I enjoy what I do, even though it pays far less than I used to get as an IT contractor,” he told Computer Weekly.

“When the turnover [of my handyman business] hits the tax limit, I do no more work. I have used my pension to pay off my mortgage and the income I do get from the business covers my bills. My wife works, so we get by.

“I could walk into an inside IR35 role at any time, but I am simply not interested in being a so-called employee with no rights. No expenses. No nothing.”

He added: “If someone calls and the assignment is interesting, then I will consider it, but I’m happy with the way things are.”

“A large number of companies still use legacy systems – especially those in banking and insurance,” he said. “The company will have used developers to update the front-end, but the back-end remains the same. The vast majority of these companies consistently choose to enhance their legacy systems to meet current business needs, instead of paying to replace existing systems altogether with costly green field projects.

“Therefore, retirees and individuals with knowledge and experience of these legacy technologies, that those newer in their careers would never have had exposure to, are an invaluable and cost-effective option to keep the lights running on tried and tested, business-critical applications.”

Bringing contractors back into the workplace with this kind of knowledge and experience can also have a positive impact on more junior IT staff, said Collingwood.

“I have seen some companies choose to use retirees and contractors versed in legacy tech to upskill junior IT professionals, [but] there are many IT professionals who aren’t excited about legacy tech, nor are they willing to learn about it,” he said. “If this continues to be the case, retirees are going to continue to have the upper hand with companies that are still reliant on legacy tech.”

Read more on IT legislation and regulation