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HMRC internal manual

Employment Status Manual

Basic principles: how to calculate the deemed payment - example

Periods up to 5 April 2002

Mr C is a draughtsman in the aerospace industry who works through his own limited company, C Services Ltd. He provides services to Client Ltd under a contract, which falls within the legislation. Client Ltd pays £40,000 to C Services Ltd for the services provided by Mr C.

Mr C:

  • does no other work in the year
  • the capital allowances that Mr C could claim on the car after adjustment for private use are £1,500; and
  • receives a benefit in kind of £2,000 in respect of the car on which the Class 1A NICs paid was £366 (this figure is for illustrative purposes only)

C Services Ltd:

  • pays him a salary of £4,000
  • provides him with a car, in respect of which it meets total running costs of £3,000 (car used 50% for business travel and 50% for private use), and
  • makes pension contributions of £2,000.

The calculation of the deemed payment is as follows:

Step One Total amount received by intermediary from client   40,000
Step One Deduct 5% flat rate deduction 2,000  
Step Two Total amount received directly by the worker from the client    
Step Three Expenses met by the intermediary, which could have been claimed as expenses against income tax if the worker had been an employee of the client and had paid for them himself 1,500  
Step Four Capital allowances in respect of expenditure incurred by the intermediary that the worker could have claimed if employed by the client and he or she had incurred the expenditure 1,500  
Step Five Contributions to an approved pension scheme by the company for the benefit of the worker 2,000  
Step Six Secondary Class 1 and Class 1A NICs paid by the intermediary for that year in respect of salary or benefits in kind provided to the worker during the year 366  
Step Seven Salary and benefits in kind received by Mr C from the intermediary which are already taxable as general earnings (includes car benefit) 6,000  
  Total Deductions 13,366 13,366
  Net amount   26,634
Step Eight Secondary Class 1 NICs on the deemed payment   2,854
  Deemed payment   23,780