Calculate the deemed employment payment for private sector engagements where the off-payroll working rules (often known as IR35) apply.
The off-payroll working rules are in place to make sure that you pay broadly the same tax and National Insurance contributions (NICs) as an employee if you:
- provide your services to a client through your own intermediary (most commonly a limited company that you control)
- would have been an employee if you were providing your services directly to a client
Where your client is in the private sector and the off payroll working rules apply, your intermediary will need to calculate the deemed employment payment. This is the amount deemed to be the income of the worker, once deductions and employer’s NICs have been removed.
You can calculate this using the deemed employment payment calculator.
You also calculate the deemed employment payment manually by following these steps:
Step 1 - deduct 5% from your off-payroll income
You start the deemed employment calculation by taking the income the intermediary has received (including non-cash benefits) from off-payroll engagements in the tax year.
You then apply a flat rate 5% deduction from this income for general expenses you’ve incurred in running your business. You don’t need to demonstrate this expenditure.
Step 2 - add payments made directly to the worker
You should add any payments or benefits paid directly to the worker by the client, rather than to the intermediary, that would have been employment income if the worker was employed directly.
You only need to add any payments that:
- weren’t paid by the intermediary
- wouldn’t otherwise be chargeable to Income Tax
Step 3 - deduct expenses
You should deduct expenses paid by the intermediary, in the tax year, that relate to the relevant engagements.
These are expenses which the worker could have claimed as a deduction under the normal rules if they had been directly employed by the client. They include expenses met by the worker and reimbursed by the intermediary in relation to the relevant engagements.
These expenses should be given using the date the bill is paid and included in the same tax year. There should be no need to split any expenses over tax years.
Where off-payroll working rules apply, each engagement will be regarded as a separate permanent employment for the purposes of travel and subsistence expenses. This means that you can’t claim expenses for travel and subsistence if you regularly commute from home to a workplace for an off-payroll engagement.
Step 4 - deduct capital allowances
You can only claim for capital allowances if the plant or machinery bought is necessary for the tasks required by the engagement.
You will only get relief if the duties of the engagement meant that the intermediary had to provide the equipment in question. If the intermediary purchases the equipment out of choice then you can’t claim the deduction.
You can’t claim the full value of items you also use for outside engagements where the off-payroll working rules don’t apply. You must reduce the capital allowances you enter by the proportion you use the asset outside the off-payroll engagements.
Step 5 - deduct pension contributions
You should deduct any contributions to an approved pension scheme made by the intermediary for the worker’s benefit.
Step 6 - deduct employer NICs
You must deduct any Class 1 and Class 1a NICs paid to HM Revenue and Customs (HMRC) by the intermediary in the tax year on the salary and benefits paid to their worker.
For example, the intermediary could be liable to pay £3,500 employer Class 1 NICs, but claims the full £3,000 Employment Allowance. The intermediary would then only pay the balance of £500 to HMRC, which is the amount you’d used in step 6 of the calculation.
Step 7 - deduct salary and benefits already paid to the worker
You need to deduct the amount of salary and benefits paid by the intermediary to their worker that has been taxed as employment income.
If, at this point, the figure is nil or a negative number, there is no deemed employment payment and no further employment taxes to pay.
Step 8 - deduct employer NICs on the deemed payment
This will give you the deemed payment.
Step 9 - pay tax and NICs on the deemed payment
Finally, you need to pay and report Income Tax and NICs due on the deemed employment payment.