If you work on an ‘inside IR35’ contract post-April 2021, then your fee-payer (agency or client) will be responsible for deducting taxes from your contract income, but exactly how is this income taxed before your limited company receives funds?
If you’re baffled by the new off-payroll legislation, which hits the contracting world from 6th April 2021, you are not alone. It is highly confusing. The new rules were originally designed to commence in April 2020, but were deferred by one year due to the COVID-19 crisis.
The questions we are asked most often here at ITContracting revolve around which taxes are deducted from contract income for those caught by the new rules, and how payments within the chain operate in practice.
Thanks to Dan Mepham from SG Accounting for answering our questions…
If a contract assignment is deemed to be caught by the off-payroll rules, which party in the chain is responsible for deducting tax from the turnover generated by the contract?
The fee-payer will be responsible for deducting PAYE from the worker’s gross pay. This may be the end-client or a recruitment agency.
Which taxes should the fee-payer deduct from the PSC contractor’s income?
Employers’ National Insurance, Employees’ National Insurance and Income Tax.
Should anything else be deducted from the contract income by the fee-payer, aside from these taxes?
PAYE is the main responsibility of the fee-payer. The fee-payer is not responsible for other employment-related deductions such as student loan repayments, holiday pay and sick pay.
This may differ if you take on a personal contract through an umbrella company so it’s best to check with a specialist contractor accountant.
Once the deemed payment has been received by the PSC, is the contractor liable for any more taxes, either corporate or personal?
No, the income is deemed as already taxed so there shouldn’t be any further personal tax or Corporation Tax (CT). CT might be payable on expenses if charging at a profit or on a flat rate scheme profit but can’t think of any other reason why they would have a CT liability.
What happens to VAT if my work is caught by the new rules?
VAT is still applied to all vatable invoices, whilst working on an inside IR35 role.
In what format can the contractor withdraw the deemed payment to pay to their personal account? A non-taxed dividend? Or is it just a deemed payment similar to a post-tax salary?
It would be deemed salary coming out of the company to them, not dividends.
What happens if, during the company year, a PSC contractor undertakes more than one contract role, where one falls under the new off-payroll rules, and the other does not?
The income derived from the role that is outside IR35 can be drawn as dividends, rather than the majority as a salary. There is often a misconception that whilst working ‘inside IR35’, you can’t draw dividends. In fact, you can, as long as the dividends come from the available profits from your ‘outside’ role.
A specialist contractor accountant like SG can help determine the difference in these profits and assist you with your income planning.