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IR35: Understanding the Fee Payer's Deduction

Unless your client is classed as a small private company, They will be responsible for determining your IR35 status - meaning whether you are considered to be employed for tax purposes (inside IR35) or in business on your own account (outside IR35). Large and medium sized private companies have had this responsibility since April 2021, and public sector clients since 2017.

If you continue to use your Limited company whilst “inside” IR35 the party paying your Company, the Fee Payer, needs to make a few deductions.

The Finance Act of 2017 requires that the Fee Payer deduct PAYE and Class 1 NIC from the fee for your services. Let’s look at an example:-

Assume you raise an invoice for £6,000 plus VAT through your Limited company. For ease we will assume there are no materials or expenses.

Invoiced amount




Deemed Direct Payment


The Fee Payer will need to deduct PAYE and NIC from the Deemed Direct Payment



Primary NIC


The PAYE deductions will be made based on a BR tax code.

Your company will receive a payment from the Fee Payer, of £5,329

Deemed Direct Payment




Less NIC


Plus VAT charged


The PAYE and NIC deducted by the Fee payer will be paid over to HMRC and will be reported through their RTI submissions.

Note there is no allowance for any company running costs in this calculation.

You will need to account for VAT according to your registration.

Within your own records you will record a reduced turnover of £4,129 and a net salary taken of the same amount, reported through your own RTI as a non-taxable payment to avoid any double taxation.

At the end of the year, adjustments can be made on your self-assessment for Pension contributions, childcare costs and any other expenses that are allowed but have not been taken into account by the Fee Payer when calculating the deductions.

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