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Spondoo Accounting

Deemed Employment Income - the calculation and reporting obligations

April 26, 2022

Scenario

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.

When and how to report to HMRC

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.

Other Record-Keeping points

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 IR35This is the net of value invoices from the contractor’s limited company to the end client.       50000Multiple this invoice amount before VAT by 5%250047500
Add
Payment Amounts from the client to the individual directlyAdditional 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.       0n/a047500
Deduct
Expenses incurred by the limited companyRelevant 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.       55n/a5547445
Deduct
Capital Allowances incurred by the limited companyYou can only claim capital allowances if the costs are incurred directly for the specific engagement in question      0n/a047445
Deduct
Payments to pension schemeEmployer pension contributions made by the client to your approved pension scheme, assuming this amount is incorporated in your aggregate net VAT invoice value       3500n/a350043945
Deduct
Employer National Insurance contributions on actual salary & benefits from Limited CompanyClass 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.       0n/a043945
Deduct
Salary and non-cash benefits paid to the worker via PAYESalary 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.       8000800035945
Deemed Employment IncomeThe 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 contributionsBalance of the above steps
less
( Balance of the above steps x (13.8/113.8) )
£31,586.12

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Information provided on the site is merely guidance that may change in line with UK law and regulations. Users must not consider this to be financial advice or their sole resource when making any financial decision. Spondoo is a trading name for Accounting SQL Limited, authorised & license accounting firm under the Institute of Financial Accountants.

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