Under IR35, how is a ‘deemed salary’ calculated?

This may be easier to explain with a simple example.

Peter is an engineering consultant with his own limited company, PEC Limited, who completed a Private Sector contract to which IR35 applied. The income received from this contract amounted to £60,000 and Peter incurred £1,000 in travelling between workplaces whilst fulfilling this contract. In addition, PEC Limited paid £250 for professional indemnity insurance, £150 for Peter’s professional engineering subscriptions and £5,000 into a pension for Peter.

The deemed salary calculation is as follows:-

A. Contract Income £60,000

Less:

B. Company Administration Allowance (Calculated as 5% of contract income) £ (3,000) (Private Sector assignments only)

C. Costs incurred in performing the contract (e.g. travel between workplaces) £ (1,000)

D. Allowable costs paid to an employee (e.g. professional subscriptions) £ (150)

E. Business Insurance Premiums £ (250)

F. Payments made to an approved pension scheme £ (5,000)

G. Subtotal £50,600

Nearly there; the figure in sub-total G represents the ‘deemed salary’ plus the associated employers’ national insurance.

Less:
H. Employers’ National Insurance £ (5,152)
Deemed Salary £45,448

So from a contract income of £60,000 a gross salary of £45,448 must be declared and the associated Income Tax and National Insurance paid by the company to HMRC.

Note: don’t forget that the Employer’s National Insurance of £5,152 is also payable to HMRC.