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IR35: when your company is required to make a deemed payment

This article explains how FreeAgent supports IR35 rules for private sector contracts where your company is required to make Income Tax and National Insurance contributions to HMRC by adding a deemed payment to your salary. For other types of contracts in the private sector and for public sector contracts, please read the guidance on how FreeAgent supports IR35 when your client deducts Income Tax and National Insurance contributions from your invoice.

When you complete a contract in the private sector for a client that doesn’t meet HMRC’s definition of a medium to large-sized business, and the project falls within the scope of IR35 rules, your company is required to make Income Tax and National Insurance contributions to HMRC by adding a deemed payment to your salary. There are two ways of doing this:

  • The company can pay you the same rate of salary each month as before, and then make the deemed payment to you as a lump sum at the end of the tax year. HMRC collects Income Tax and National Insurance contributions on the amount of the deemed payment. 
  • The company pays you a higher rate of salary each month, which includes the deemed payment in addition to your usual salary. HMRC collects Income Tax and National Insurance contributions from this increased monthly salary so that at the end of the tax year your company has no further salary or tax payments to make.

FreeAgent takes the data you enter about each of your IR35 projects to calculate the total deemed payment that your company is required to make. However, these figures will only be accurate if you are the only employee of your company. If your company employs more than one person please speak to an accountant, who should be able to advise you how to proceed. 

If you are the only employee of your company, follow the steps outlined below when you work on an IR35 contract that requires your company to increase your salary by way of a deemed payment and pay extra Income Tax and National Insurance contributions to HMRC.

Set up the contract as an IR35 project

Create the project in FreeAgent as normal and tick the box marked 'Is 'Employment' under IR35?' in the 'More Options' area. 

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You should then manage the project in FreeAgent as you normally would, entering any invoices, allowable expenses, bills and bank transactions and linking them to the project.

Please note that if any of these allowable costs are out-of-pocket expenses, you should only link them to an IR35-enabled project in FreeAgent once you have reimbursed yourself for them.

If other users have access to your FreeAgent account, you should ask them not to include income and expenditure information relating to your IR35-enabled projects, otherwise the figures they enter will be included in your deemed payment calculations.

Review the information in your IR35 report

Once you’ve entered all the invoices, allowable expenses, bills and bank transactions associated with the IR35 contract (and made sure you’ve linked them to the project in FreeAgent), your IR35 report will be ready for you to review.

To view your IR35 report, navigate to the ‘Accounting’ tab at the top of your screen and select ‘Reports’ from the drop-down menu.

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Select ‘IR35’ from the ‘Breakdown’ section.

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Your IR35 report includes a month-by-month view of the accumulated income and allowable expenses across all your IR35 projects. In accordance with HMRC’s guidance, income and costs are included in the report on a cash basis. This means that the revenue is recorded based on the date of each invoice receipt and the costs are included based on the date that they are paid.

The report also displays the deemed payment that FreeAgent calculates that you will be required to add to your salary at the end of the month or tax year. 

If you have other income from non-IR35 contracts and your company has made pension contributions on your behalf, you may need to make some adjustments to your IR35 report. An accountant should be able to help you do this.

Edit your payslips to account for the deemed payment

Whether you choose to make the deemed payment as a lump sum at the end of the tax year or through a monthly increase to your salary, you will need to account for this by editing your payslips in FreeAgent’s payroll. 

If you choose to make the deemed payment as a lump sum at the end of the tax year, you will need to edit your month 12 payslip by entering the ‘Potential Deemed Payment’ value displayed in the relevant column of your IR35 report in the ‘basic pay’ field of the payslip. 

If you choose to make the deemed payment by increasing your monthly salary, enter the relevant ‘Potential Deemed Payment’ value displayed in your IR35 report in the ‘basic pay’ field of each month’s payslip. Bear in mind that this figure may change each month across the course of the tax year, so you should check the report before entering your payslip details each month.

If you choose to increase your monthly salary, you will need to check that the ‘Potential Deemed Payment’ figure on your IR35 report has changed to zero once you have generated your month 12 payslip. If the figure hasn’t reduced to zero, you will need to return to the payslip and increase your gross salary and/or employer pension contributions.

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