Calculating the deemed employment payment

By Tolley
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The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Calculating the deemed employment payment
  • The calculation generally
  • The steps
  • The calculation result
  • Payment to the individual

Many people supply their services to clients, not directly as a self-employed person, but via a company. The tax and NICs advantages of this way of working are significant. See the Introduction to personal service companies guidance note.

Since April 2000, anti-avoidance legislation, known as ‘IR35’, catches individuals who would be employees of their clients if they were engaged directly rather than using a service company. See the Employed or self-employed guidance note.

From 2016/17 onwards, when an intermediary provides the services of a worker to a public sector body, the IR35 rules do not apply. See the Intermediaries and the public sector guidance note for more information.

The intention of IR35 is to collect roughly the same tax and NICs as would have been paid if an individual had been employed directly by his client. The obligation to calculate and pay the tax and NICs rests with the service company and not the client.

The diagram below shows the interaction of the IR35 calculation with a personal service company (PSC) structure.

Separate legislation exists for tax and NICs. For tax, the calculation is known as the ‘deemed employment payment’ calculation, for NICs it is the ‘attributable earnings’ calculation.

ITEPA 2003, ss 48–61; SSCBA 1992, s 4A; SI 2000/727 (subscription sensitive)

In most cases the calculations are identical, but not invariably. Those who provide services as teachers, cleaners, non-executive directors or entertainers may be subject to special rules. The same is true of cross-border workers ― see the Other points on personal service companies guidance note.

The calculation generally

If one or more engagements in a tax year are within IR35, the intermediary must calculate and pay over the PAYE and NICs. The intermediary is normally a company, but could be a partnership or even an individual (see the Personal service company rules guidance