IR35: Computation - Question 20
The IR35 deemed payment may result in the worker paying higher rate tax. Higher rate taxation would preclude the worker from claiming HMRC initiatives such as Family Tax Credit or Children's Tax Credit. The actual salary paid to the worker may involve a considerable shortfall to the deemed emolument, therefore the tax/NIC deductions will not be commensurate with actual income and the worker may even more so require application of the new Tax Credits!
People organising their affairs through an intermediary are not precluded from claiming the Children's tax credit (CTC) or Working Families' Tax Credit (WFTC). However, the intention is to focus CTC on low to middle income families and that is why the amount of the tax allowance is gradually tapered away when the taxpayer becomes higher rate. Their liability to higher rate tax can be affected by all taxable sources of income, including the IR35 deemed payment and any dividend income that they receive, so where the worker was previously taking substantial amounts of income in the form of dividends the change to the IR35 deemed payment may not affect their liability for higher rate tax. The government believe that the deemed payment fairly represents the worker's income for tax purposes, and for the purposes of eligibility for CTC, where he or she has a material interest in the intermediary. This ensures a level playing field with someone who is directly employed.
The income definition used for Working Family Tax Credit is different, and is not based on tax liability.
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