Working through a limited company is one of the most tax-efficient ways to work as an independent contractor. This set up tends to work well for contractors who are deemed as working ‘outside of IR35’, but if you’re caught ‘inside IR35’ it’s highly likely you’ll pay more tax.
Let’s look at how your take-home pay can be affected by IR35.
Take home when working outside IR35
If it’s decided that your contract places you outside of IR35, you can choose to pay yourself a small salary and the remainder via dividends – this is the most tax-efficient way to get paid.
However, it is your responsibility to ensure you pay the correct taxes by their respective deadlines.
How working inside IR35 affects your take-home pay
Being caught by IR35 eliminates many of the benefits of working through a limited company. This is because nearly all your ‘deemed salary’ from that contract will be subject to Income Tax and National Insurance Contributions.
Whereas, by working through a limited company you can opt to pay yourself dividends which aren’t subject to National Insurance Contributions.
Obviously, by paying more tax, your take-home pay will be less.
At the end of the tax year you will need to calculate a ‘deemed payment’. This is paid to HMRC and it accounts for any extra tax and National Insurance Contributions that are due on contracts caught by IR35.
Extra care must be taken when working out the value of a deemed payment, so it’s advisable to get an accountant to handle it for you.
How to calculate a deemed payment
Here’s an overview on how to calculate a deemed payment:
- Decide which contract(s) IR35 applied to throughout the year
- If IR35 applies to more than one contract, add the totals together. You’ll also need to include any non-cash benefits, such as gifts, accommodation or use of a car
- To this total add 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
- Deduct 5% is from this total (this is as an allowance for running a limited company)
- From what remains, other deductions can be made including pension deductions, certain travel expenses and capital allowances on equipment and machinery necessary for your work
- Further deductions are made for any employer’s NIC your company has already paid, Class 1A NIC’s, salary and reimbursements of allowable expenses, 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 left is negative, then no ‘deemed payment’ is due
- If the number is positive, further calculations are required to work out your deemed payment
The deemed payment is due to HMRC by 19th April at the end of the applicable tax year and should be detailed on your end of year PAYE returns and Self-Assessment return.
What else do I need to know about IR35?
Whether you’re new to contracting or are a seasoned contractor we always recommend you get professional advice on any aspects of IR35.
For over twenty years our Directors have been supporting contractors, including offering advice and guidance on IR35. Get in touch with us on 01962 867550 or send us a message using our online contact form.