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 make sure workers pay broadly the same tax and National Insurance contributions as an employee if they:
- provide services to clients through their own intermediary - most commonly a limited company that they control
- would have been an employee if they were providing their services directly to a client
The intermediary will normally be the worker’s own personal service company, but could also be a partnership, a managed service company or an individual.
If the client is in the private sector and the off-payroll working rules apply, the 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 National Insurance contributions have been removed. The private sector includes third sector organisations, such as some charities.
How the rules are applied will change from 6 April 2020. See how those changes could affect you.
You can use the Deemed Employment Payment Calculator (Excel file) to calculate the deemed employment payment.
You can 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 incurred in running the business. You do not need to demonstrate this expenditure.
Step 2 - add payments made directly to the worker
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:
- were not paid by the intermediary
- would not otherwise be chargeable to Income Tax
Step 3 - deduct expenses
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.
If 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 cannot 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 cannot claim the deduction.
You cannot claim the full value of items you also use for outside engagements where the off-payroll working rules do not 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 National Insurance contributions
You must deduct any Class 1 and Class 1a National Insurance contributions paid to 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 National Insurance contributions, but claims the full £3,000 Employment Allowance. The intermediary would then only pay the balance of £500 to HMRC. This is the amount you would 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 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 National Insurance contributions on the deemed payment
This will give you the deemed payment.
Step 9 - pay tax and National Insurance contributions on the deemed payment
Finally, you need to pay and report Income Tax and National Insurance contributions due on the deemed employment payment.