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 paid £5,000 into a pension for Peter.
The deemed salary calculation is as follows:-
A. Contract Income £60,000
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 subtotal G represents the ‘deemed salary’ plus the associated Employer’s National Insurance.
H. Employer’s National Insurance £ (5,089)
Deemed Salary £45,511
So from a contract income of £60,000 a gross salary of £45,511 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 £5,089 is also payable to HMRC.
For more information on IR35 and the upcoming changes to the private sector, take a look at our IR35 hub.