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When should I calculate the ‘deemed payment’?

Q. I’ve always worked on outside IR35 contracts, but for the first time I’m considering taking a new contract which I consider would be caught by IR35 – the client will not be deducting any employment taxes. How should I account for this? Is it ok for my PSC to just pay me entirely in salary? Or do I need to do some sort of deemed payment calculations?

A. You’ll need to pay HMRC a ‘deemed payment’, as any contractor currently working inside IR35 in the private sector must. In simple terms, the ‘deemed payment’ is the tax and National Insurance Contributions owed to HMRC for the time spent working as an ‘employee for tax purposes’ on a contract.

You can calculate this here or, should you prefer, you can ask an accountant to do this on your behalf – HMRC will grant you a 5% expenses allowance if you would rather have your accountant sort this. Given the ‘deemed payment’ can be tricky to work out, this is something many contractors choose to do. 

If you operate inside IR35 in the public sector or, when reform lands in the private sector on 6th April 2020 and you contract with a medium or large business, it will be the fee-payer’s responsibility to calculate the ‘deemed payment’ and deduct it from your invoices. This will be the recruitment agency you work through or your client. As a result, the 5% expenses allowance, which is in place to help contractors pay accountants when calculating the ‘deemed payment’ has and will be scrapped.

However, if you’re engaged by a company deemed to be ‘small’ by HMRC after private sector reform lands next year, you will still be expected to calculate the ‘deemed payment’ yourself and as such you can make use of the 5% expenses allowance. 

This answer was provided by IR35 specialist, Qdos Contractor.

By Contractor Doctor


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