DEEMED SALARY – OFF-PAYROLL – IR35 – HOW DOES IT WORK- ACCOUNTING RECORDS
If you are caught by IR35, you will have a different choice to choose from, in terms of work.
- Become an employee.
- Work under umbrella. This option is not advisable.
- Off-payroll through your Ltd Company
- Work as Self Employed ( Better than all the above options if ultimate client allow it)
Working through your Ltd company under IR35, you will invoice the agency or the Client with your gross invoice amount, the agency will deduct from your gross invoice Income tax and national insurance contribution before paying the net amount? This is known as deemed salary payment. Where other contracts that you might have outside IR 35 you will get your income paid gross as usual without any tax deducted.
Expenses allowance under IR35:
You will still be able to claim all expenses which are incurred wholly, necessarily, and exclusively for the purpose of the business, such as pension contribution, Capital allowances, however under IR35 travel and subsistence costs are not tax deductible, instead you will get 5% off your income not taxed under PAYE, to cover these admin expenses. If you do not have any other income that is not caught by IR35 from other source, and the 5% allowance given is not enough to cover your admin expenses then you could end up as having losses to be carried forward to set off against future profits.
This 5% deduction from your invoice before paying income Taxes is still taxable under the company’s corporation tax but it will be used against the company expenses such as accountancy fees etc. If is not used all, the remaining will be part of the retained profits until it is distributed to shareholders as dividend.
Let us take an example. Private sector
You the LTD Company invoice the agency for work done £1,0000,00 Plus VAT £24000. The agency will tax you on 95% of your invoice for income pay and NI, and pay you net income of taxes of £60,244 + £6000, Plus £24,000 VAT.
|OTHER INCOME 5%||6,000|
|DIRECTOR LAON AC||60,244|
Then write a cheque and take all the money out. Cr: bank and Dr: Director Ac. £60,244
The Profit and loss account will show £6000 as being profit. This as explained above can be used for expenses or taken as dividend.
Another simple example: Public sector
Here there is no 5% allowance, so Ltd company invoice £1,140 and receive net £812.92.
CR SALES PL £1140
DR IR35 TAXES PL £327.08
DR Deemed salary PL £812.92.
CR DLA BS £812.92
DR BANK BS £812.92
Write a cheque and take out the money is tax free. Your profit and loss account will end up showing a loss for the accountancy fees paid, which is then carried forward. Until is used against other income that is out of IR35.
Note to consider here, the agency or the end client will only deduct income tax and national insurance employees, and employer, but will not deduct anything else such as student loan, holiday pay, or sick pay. You are not an employee of the agency and therefore you are still responsibility for any additional taxes. The deemed salary is already taxed and there is no further tax to be paid on it, it should be taken as salary not as dividend. And you will still file company accounts and self-assessments returns as usual.
HMRC LINK FOR HOW TO CALCULATE THE DEEDMED EMPLOYMENT PAYMENT