If your contract income is caught by the IR35 rules, then your take-home income will be in the form of a ‘deemed payment’, rather than salary and dividends. Here we explain how this payment is calculated.
Important things to bear in mind before you start
Many people mistakenly think that IR35 applies to an individual. It doesn’t. The Intermediaries Legislation applies to fixed-term contracts. A contractor may work on two seperate assignments. One is deemed to be inside IR35, whereas the other may fall outside the rules.
IR35 has become even more complicated as a result of the off-payroll add-on, which means that clients are responsible for determining IR35 status, rather than contractors themselves. These rules were rolled out for all public sector contractors from April 2017 onwards, and will apply to most private sector contractors from April 2020 onwards.
One of the most unfortunate consequences of this additional layer of legislation is that contractors caught by IR35 can no longer claim the 5% administration allowance (see below). This change applies to public sector contractors already, and will affect all IR35-caught contractors in the private sector from April 2020.
How to calculate your deemed payment if your work is caught by IR35
1. Deduct the 5% allowance
You can deduct a flat 5% percentage of all the income generated by an IR35-caught assignment. This ‘allowance’ is meant to cover the costs of running a limited company, and no receipts are required.
2. Add any direct payments to the worker
Any untaxed payments made to the worker – such as employment-type benefits.
3. Deduct any expenses incurred
Any expenses incurred solely for business purposes, such as professional fees (accountants), professional indemnity cover.
4. Capital Allowances
The company can claim capital allowances on any ‘plant and machinery’ costs incurred – for example computer equipment purchased by the company to fulfil its contract duties with an end-client.
5. Pension Contributions
Deduct and pension contributions made by the company into a registered pension scheme.
6. Deduct Employers’ NICs on Salary / Benefits
Any Employers’ NICs already paid by the company on salary / benefits provided to the worker.
7. Deduct Salary / Benefits already accounted for
Deduct the sum of salary and benefits already paid to the worker during the tax year. If the calculated sum is zero, or negative, then no deemed payment needs to be made.
8. Deduct Employers’ NICs on the Deemed Payment
Employers’ NICs are charged on the outstanding sum.
9. Pay Income Tax and NICs to HMRC
The deemed payment sum must be paid to HMRC via RTI on or before 5th April – at the end of the tax year in question.
Deemed Payment – a Worked Example
In this example, a contractor earned £50,000 for an in-IR35 contract during the 2019/20 tax year. The worker drew down a £8,000 salary, incurred £1,800 in allowable expenses. £1,200 computer equipment was subject to capital allowances, and £3,000 was contributed to an approved pension scheme.
|Start||Income from contract assignment||£50,000|
|Step 1||Deduct 5% Allowance||(£2,500)|
|Step 2||Total received direct from client to worker|
|Step 3||Allowable expenses paid by the intermediary||(£1,800)|
|Step 4||Capital Allowances||(£1,200)|
|Step 5||Pension Contributions||(£3,000)|
|Step 6||Employers’ NICs already paid on salary and benefits|
|Step 7||Salary Paid to Worker||(£8,000)|
|Step 8||Employers’ NICs Due||(£3,431.78)|
|Employees’ NICs on Deemed Payment||(£2,572.35)|
|Additional PAYE on Deemed Payment||(£3,513.64)|
|Your Take Home||Salary + Deemed Payment (After Taxes)||£31,982.23|