[Updated on 29 May 2015]
IR35 legislation came into effect in April 2000 to identify individuals who work as disguised permanent employees to avoid paying taxes. The legislation challenges those individuals who supply their services to clients via an intermediary which can be known as a personal service company, limited company or partnership.
If a contractor has the same benefits, responsibilities and control as a permanent employee they are more likely to be caught inside IR35. When IR35 applies, the earnings for the engagement of the intermediary will be in the form of “Deemed Payment”, also called the “Deemed Employment Payment” as they are ‘deemed’ to be the income of the worker. Deemed payment is usually paid out on 5 April at the end of each tax year.
If there is more than one worker providing services to a client under the same contract, deemed payment will need to be calculated for each worker separately. In case the client makes a single payment this must be split proportionately amongst each worker. Where you have your spouse or a relative working for a client through your company you will need to work out a deemed payment for them too.
How do I know if I need to calculate deemed payment?
To check if you need to work out the deemed employment payment follow the steps below:
Step 1 – Calculate how much your company received in a tax year from engagements under IR35 (take account of all payments and benefits)
Step 2 – Calculate your employment income that you received from your company (this is the amount on which income tax and NI deductions were made)
If the amount in step 1 is more than the amount in step 2 you will need to calculate the deemed employment payment.
However, if the figure in step 1 is equal to or less than the figure in step 2 you do not require to calculate deemed payment as there is no additional amount on which tax and NI have to be paid.
How to calculate deemed payment?
Below is the basic formula to calculate deemed payment.
- Calculate total income received by your company over the tax year from any contract that falls under IR35 rules
- Deduct 5% expenses allowance (this is based on the whole income figure before any deductions)
- Deduct any allowable expenses (anything that would be treated as tax free if you were an employee of the client, take account of both expenses that were reimbursed by the client and those that were not reimbursed but borne by you.)
- Deduct capital allowances (Capital allowances can only be claimed on assets that you get exclusively to perform your work)
- Deduct employer NI already paid
- Deduct gross salary already paid
- Balance subject to PAYE
- Deduct employer NI payable
- The remaining total is deemed payment
You can use the IR35 deemed payment calculator to calculate deemed payment. To help use the calculator there is guidance on additions and deductions.
You will need to calculate deemed payment earlier than 5 April if you close your company or cease to be an employee or director of the company at anytime during the tax year. In these circumstances you will need to work out the deemed payment instantaneously and settle the PAYE liability by the 19th day of the following month.
Key dates to remember for ‘Deemed Payments’
- 5th April: Calculate your IR35 Deemed Payment
- 19th April: Send HMRC any tax and NICs due on IR35
- 19th May: Send your End of the Year PAYE returns (forms P35 and P14) to HMRC and include any IR35 deemed payment and tax and NICs due. (NOTE: If you have not yet finally calculated your IR35 deemed payment then inform HMRC that you have provided them with provisional figures.)
- 31st January: If you send HMRC provisional figures on 19 May, then send them corrected forms P35 and P14 with corrected figures. Now, pay any balance of tax and NICs due at the same time as sending corrected figures. (NOTE: failing to follow it may invite penalties from HMRC.)