What is an IR35 deemed payment?

What is a deemed payment and how to calculate it

We often talk about the IR35 deemed payment when discussing IR35. It is the payment which is made to the Revenue when you are operating inside the legislation, to account for the extra tax and national insurance which is due on an assignment where the IR35 legislation applies.

Contractors actively seek to avoid having to make a deemed payment on assignments as it can drastically reduce their take home pay and the financial benefits of operating via a limited company. However, there are times when a contract is still worth taking on even when it is not IR35 compliant and changes cannot be reasonably made. So how does the deemed payment work?

• The IR35 deemed payment is calculated at the end of the tax year. Throughout the year, you will pay tax and national insurance on any salary you pay yourself as normal.
  
  

• You will need to decide which contracts IR35 applied to throughout the year by evaluating the written terms of the contract and your working practices during its term. More information on the tests used and services offered to do this are on our website.
  
  

• The total amounts received by your company for the applicable contracts should be added together, including any non-cash benefits such as gifts, accommodation or use of a car.
  
  

• 5% is then deducted from this total as an allowance for the costs of running your business.
  
  

• Any other payments from clients or the value of non-cash benefits received where PAYE has not already been deducted or the benefits have not been declared on a P11D are then added.
  
  

• From the amount which now remains, deductions are made for pension contributions, certain expenses such as travelling to a temporary workplace and capital allowances on equipment and machinery without which you could not do your job. It is worth noting that the salary of a spouse working for you in an administrative role would unlikely be allowed when calculating your deemed payment.
  
  

• Further deductions are then made for any employers NICs your company has already paid, Class 1A NICs, salary and reimbursements for allowable expenses, and the value of any benefits you have received from your company, on which PAYE and NICs have already been paid or will be paid when you send in form P11D.
  
  

• If the number which is left is a positive number, then further calculation is needed. If the number is negative, then there is no deemed payment required.
  
  

• The positive number is multiplied by 100 and then divided by 100 + the employer’s contribution rate applicable to you (e.g. if the rate applicable to you is 12.8, you divide by 112.8). Your rate will be affected by whether you have opted in or out.
  
  

• The outcome of this calculation is your deemed payment. However if the sum of taxable salary is less than the secondary Class 1 NICs earnings threshold, a further calculation will be required to determine the amount of Class 1 NICs due on the deemed payment.

The deemed payment must be paid to HMRC by 19th April at the end of the applicable tax year along with any other tax and NI payments due, and should be included in the end of year PAYE returns and your Self-Assessment return. On the P35 form, you will be asked whether a deemed payment is included in the total but other than this, you will not need to make any other distinction to the payment on any of the forms. It is also possible to make a provisional payment if you are unable to make the full payment.

You should keep all information and calculations leading to your deemed payment being made, just as you should maintain all contracts and information leading to your decisions on whether IR35 applies or not. Keeping organised throughout the year makes life a lot easier when 5th April comes around. It is also advisable to appoint an accountant who is well versed in the nature of IR35 and will therefore be able to assist you with any deemed payments which need to be made.