Off-payroll working in the public sector: personal service companies
What to do if you're paid through a company you own, for work done in the public sector.
Off-payroll working changes
Many people use their own limited companies also known as a personal service companies (PSCs) to provide their services to clients.
Depending on the nature of the contracts and services you provide through your company, your work can be deemed to be an employment for tax purposes. Existing rules, the intermediaries legislation (often known as IR35) tell you how you should treat payments received from contracts like that. The way in which those rules are applied for contracts in the public sector is changing, following the introduction of new provisions for off-payroll working.
From 6 April 2017, where you provide your services to a public authority client, new rules apply, the client, agency or other third party who pays you (the fee-payer) will deduct Income Tax and primary Class 1 National Insurance contributions (NICs) from your fees.
The fee-payer calculates a deemed direct payment and pays Income Tax and Class 1 primary NICs arising on it over to HM Revenue and Customs (HMRC) on your behalf. Those payments are reflected on your tax records and contribute to your state benefit entitlement. They will also pay secondary Class 1 NICs on the deemed earnings.
Deciding if the rules apply
When you are considering a contract for providing your services to a public authority client, they will decide whether the off-payroll working legislation should apply. That decision is informed by a variety of factors based on the nature of the contract and the services you will provide to the client.
You can use the ‘Check employment status for tax’ service to find out if the off-payroll working legislation applies.
Where it has been determined that the rules should apply, how your company gets paid for your work will change.
Payments received from the fee-payer
The fee-payer is the organisation who is paying your company for the services you provide. The person paying your company will pay VAT (if you are VAT registered) and then deduct Income Tax and primary Class 1 NICs from your fee.
As an example (figs are illustrative):
- your company invoices the fee-payer for £7,200 for services provided (£6,000 fees and £1,200 VAT)
- the fee-payer deducts £1,871 (£1,458 tax and £413 primary Class 1 NICs) which it pays to HMRC
- your company receives £4,129 for your services plus £1,200 VAT
- the fee-payer also pays secondary NICs on the deemed direct payment
Paying yourself through your company
The off-payroll working legislation will allow for your company to receive a deduction up to the full amount of the deemed direct payment so you won’t be taxed twice. There are a number of ways your company can pay you for your services. These include either or both of:
- paying you a salary through your company’s payroll
- paying you a dividend from the company profits
You can pay yourself for the work provided to public sector clients through your company’s payroll. There are changes to the way you operate your payroll for new or existing public sector contracts, which are subject to the new provisions.
Your company will receive a deduction up to the total of the net fee, exclusive of VAT received from the fee-payer. In the example given, that would be a non-taxable payment up to the total of £4,129 that does not require further deduction of Income Tax or NICs. You can pay yourself that amount through your payroll without Income Tax and NICs.
You should report to HMRC non-taxable payments your company pays you on the Full Payment Submission (FPS) that your payroll software produces.
If you also work in the private sector, you will need to determine if the existing intermediaries legislation rules apply to that work. Where they do, you will need to calculate a deemed employment payment for those contracts.
You must report the pay, Income Tax and NICs to HMRC each time your company pays you, using your payroll software. The deductions must be paid over to HMRC by the 19th or 22nd calendar day of the following month, depending on your payment method.
Secondary Class 1 NICs will be payable on earnings paid through your company’s payroll on which you deduct primary Class 1 NICs.
If you are a director of your own company, you might choose to pay yourself a dividend from the company’s profits, where you have chosen to leave the money in the company. You can pay yourself a tax-free dividend up to the total of the net fee received from contracts in the public sector, where Income Tax and NICs have been deducted at source. You do not need to declare that dividend on your self-assessment return.
Corporation Tax calculations
When you are calculating your company’s income, you should deduct the total amount of the invoice, less the amount of Income Tax and NICs that were deducted at source. In the example given, that would be £4,129 (£6,000 minus £1,871). Your company accounts should reflect this deduction to ensure the amount is not taxed twice.
If you are VAT registered, you should continue to include VAT in your invoices. You will need to file your VAT returns and pay over to HMRC any VAT payments that are due.
Published: 3 February 2017
From: HM Revenue & Customs