Recent analysis shows that the UK tax régime, when combined with hidden inefficiencies in employment, has tipped the balance in favour of co-sourcing. For many businesses, especially those with mid-sized teams, co-sourcing part of their workforce is no longer just a cost-saving tactic – it’s a strategic imperative.
The real cost of employment under the current tax regime
A full-time UK employee on a gross salary of £40,000 per year costs their employer far more than that headline figure.
When you include the following statutory and typical costs:
Employer’s National Insurance: £4,264
Employer pension contributions: £1,013
Liability insurance and other on-costs: £100
…the real annual cost per employee rises to around £45,377.
That might still seem manageable—until we factor in actual time spent on work.
The hidden cost of lost work time
According to CIPD data, (https://www.cipd.org/en/about/press-releases/workplace-absence-soars-nearly-two-working-weeks-each-year/) absenteeism and sickness now account for nearly two working weeks per employee each year. Once legally mandated holidays and other absences are included, the average UK worker’s productive time drops from 1,820 to around 1,570 hours annually.
But that’s not all. Studies have also shown that distractions in the workplace—whether digital, social, or environmental—can potentially drain another 15 hours per week from time engaged on work (https://pplprs.co.uk/productivity1/uk-workers-lose-up-to-15-hours-a-week-to-distractions-totalling-74-days-every-year/)
In real terms, that means many employees are delivering as little as 890 productive hours per year or just under 6 months of 35-hour weeks.
When the total employment cost is divided by those hours, the effective cost per productive hour exceeds £50 – a level that few businesses can sustain competitively.
Co-sourcing as a financial and strategic response
This combination of high tax-driven employment costs and low time dedicated to work makes co-sourcing a logical choice for some employers. By transferring part of their operations to a co-sourcing partner, employers can:
- Reduce cost per working hour, as a co-sourcing provider can typically achieve higher efficiency through scale and technology.
- Eliminate or reduce National Insurance and pension obligations, as these are borne by the partner company rather than the client.
- Access specialised skills and flexible capacity without long-term headcount commitments.
- Redirect internal resources toward higher-value activities.
A co-sourcing provider can deliver the same volume of work for a fraction of the total employment cost, while offering measurable improvements in turnaround and service quality.
A shift in strategy, not just in structure
Co-sourcing represents an agile response to a tax and labour environment that increasingly penalises fixed payrolls. It replaces the former Outsourcing model that was about shedding jobs and moving their costs off the balance sheet. Co-sourcing is a strategic alliance between Client and Co-sourcer, built around business outcomes and not hours worked.
By using co-sourcing arrangements, companies can retain core expertise while delegating routine or process-driven tasks to partners with better-optimised operations. The result is a leaner, more flexible business capable of scaling up or down without the tax and compliance burden of traditional employment.
Conclusion
The UK’s employment tax structure has reached a tipping point where the true cost of in-house labour outweighs its potential for performance.
Co-sourcing offers a clear path forward: reduction in fixed costs, the potential for greater efficiency, and the opportunity to focus on core strategy.
The tax régime hasn’t just made co-sourcing a viable proposition, it’s made it an astute decision for organisations aiming to stay competitive in today’s economy.
Find out more about your co-sourcing options
