The following calculations apply to individuals working via limited companies under a contract that falls within IR35, where the obligations fall on the contractor and the contractor’s business.
This will typically be where the contractor client is a small business. Contractors providing services to a public sector client, or any medium or large-sized client outside the public sector will not usually need to perform this calculation as the tax and national insurance will be withheld by the client directly.
The employment income amounts are still reported under PAYE’s Real Time Information (RTI) process, ideally within normal deadlines. However, given the complexitiy of the calculations, the deemed employment income elements that be reported via an EYU submission on or before 31 Jan following the year of the tax year – the 31 Jan is also the payment deadline for the taxes due.
The deemed employment income needs to be included within the income on the individual P60
The deemed employment income plus the associated employer’s national insurance is an allowable expense within your Corporation Tax Return (CT600)
For VAT registered companies, VAT is due on the invoices from the limited company to the client in the normal way.
Input | Description | Input Example | Calculation | Output | Output Example | Balance | |
Add | Aggregate Invoice Amounts (Net of VAT) from Limited Company to Clients that fall within IR35 | This is the net of value invoices from the contractor’s limited company to the end client. | 50000 | Multiple this invoice amount before VAT by 5% | 2500 | 47500 | |
Add | Payment Amounts from the client to the individual directly | Additional invoices or payments to the contractor not via the limited company. Note – if the additional payment has already gone via the PAYE scheme of the client or an Umbrella company (and taxed), they do not need to add the payment in this section. | 0 | n/a | 0 | 47500 | |
Deduct | Expenses incurred by the limited company | Relevant expenses paid during the tax year that relate to the specific contract. Note – they should only be expenses that are deductible under normal rules if the client was employed directly by the client. | 55 | n/a | 55 | 47445 | |
Deduct | Capital Allowances incurred by the limited company | You can only claim capital allowances if the costs are incurred directly for the specific engagement in question | 0 | n/a | 0 | 47445 | |
Deduct | Payments to pension scheme | Employer pension contributions made by the client to your approved pension scheme, assuming this amount is incorporated in your aggregate net VAT invoice value | 3500 | n/a | 3500 | 43945 | |
Deduct | Employer National Insurance contributions on actual salary & benefits from Limited Company | Class 1 and 1a National Insurance Contributions paid to HMRC by your Limited Company in the tax year. This amount is after claiming Employment Allowance, so it is the actual balance due. | 0 | n/a | 0 | 43945 | |
Deduct | Salary and non-cash benefits paid to the worker via PAYE | Salary amounts processed from the Limited Company to the Worker, ideally via the PAYE scheme of this incorporated entity. This should not be confused with the deemed employment income amount you are calculating via this process. | 8000 | 8000 | 35945 | ||
| Deemed Employment Income | The deemed amount that needs to be reported in your limited companies PAYE scheme upon which tax and national insurance should be applied. The amount is the balance of the steps above Grossed Down by the notional employer’s national insurance contributions | Balance of the above steps less ( Balance of the above steps x (13.8/113.8) ) | £31,586.12 |
