The problem with deemed payments

If you have established that some of your work will be caught by IR35 and that PAYE tax and NICs will have to be accounted for on a deemed salary payment at 6 April 2017, can you now put IR35 from your mind? Well, you can if you are happy to take the balance of your earnings out of the company in the form of dividends, or to leave them in the company, but if you should take the earnings as salary in 2017/18, did you know that you will have to account for PAYE tax and NICs again, on the actual payment?

Leaving the net earnings in the company will not of itself create a tax charge, although it may have implications for capital gains tax in the future. Nor does taking the earnings out in the form of dividends - HMRC have confirmed that subject to certain reporting requirements, they will effectively ignore any dividends which represent earnings already taxed under the IR35 rules.

However, all salary taken after the deemed payment date of 5 April in any tax year must be subjected to PAYE, whether it represents earnings of the current year or earnings on which tax and NICs have already been paid as an IR35 deemed payment.

What can I do to avoid this double charge?

Assuming you do actually want to extract the earnings from the company, you have two choices:

  • First, you can take the earnings in the form of dividends. This might be expected to create problems for those wishing to invest in personal pensions, but the fact that the deemed payments are relevant earnings should alleviate this, or
  • Second, you could simply pay yourself enough in salary during the year to avoid having anything caught by IR35. If you look at the computation rules you will see that the deemed payment is after deducting actual payments in the year.

Of course there are two other options - either to end your current work structure and join your customer's payrolls, or less drastically, to re-arrange your contracts so that they do not fall foul of IR35.

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