IR35: Computation - Question 10  

How do I pay the IR35 deemed payment at the end of the year?

The IR35 deemed payment is simply the figure on which the tax and NICs due to be paid at the end of each year needs to be calculated. It is not a payment which the company must physically make. You should pay the tax and NICs over to HMRC as for any payment of salary, through PAYE, and include the deemed payment and the related tax and NICs in your end of year return.

The calculation has to be done at the end of each tax year unless you leave the PSC or partnership.

You start with the total income, which the company receives for relevant contracts, and deduct 5 per cent. Then you may need to add anything the worker receives directly (see Q17). You can also deduct any contributions the PSC makes towards a pension, any expenses and capital allowances which would have been allowed under the normal employment income rules if the worker had been an employee of the client and had incurred them personally, and any employer's National Insurance contributions paid by the company. If the remainder is more than the salary which the worker has drawn during the tax year, your company will have to pay PAYE and National Insurance contributions on the difference. It is the tax and NICs that has to be paid over to HMRC (see paragraph 7 of the Finance Bill Schedule for full details of the steps in the calculation). An example calculation follows:

Mr Worker works through his own PSC. He provides services to Mr Client under a contract which falls within the IR35 rules. Mr Client pays £40,000 to Mr Worker's PSC for the services provided by Mr Worker.

Mr Worker does no other work in the year in question. He pays himself a salary of
£20,000 during the course of the year, and operates PAYE and deducts NICs from that salary in the usual way.

The PSC buys Mr Worker a travel card for £500 to allow him to get to Mr Client's business premises. It also pays £4,000 into Mr Worker's pension scheme

Chapter 8, Section 54 £ £ Step One Total amounts from client (all subject to new rules)   40 000 Deduct     5% 2000   Step Two (Not applicable) -   Step Three Allowable employment income expenses related to contract 500   Step Four (Not applicable) -   Step Five Employer's pension contributions to an approved scheme 4 000   Step Six Employer's NICs on earnings paid in year 1 891   Step Seven Salary paid in year 20 000         Total deductions 28 391 28391       Balance 11609 Balance not nil or a negative amount, so move to Step Eight/Nine Step Eight/Nine Deemed payment = Balance divided by (100+12.8) 10 291 Employer's NICs due on the deemed payment 1 318

(The calculation assumes the NICs contributions rates, thresholds and earnings limits for 2007-08)

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