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 | £7,200 |
VAT | £1,200 |
Deemed Direct Payment | £6,000 |
The Fee Payer will need to deduct PAYE and NIC from the Deemed Direct Payment
PAYE | £1,458 |
Primary NIC | £413 |
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 | £6,000 |
Less PAYE | (£1,458) |
Less NIC | (£413) |
Plus VAT charged | £1,200 |
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.
To find out more about how Orange Genie Accountancy could help you, please call 01296 468 185 or email accountancy@orangegenie.com.
Why Orange Genie Accountancy?
Orange Genie Accountancy offers fixed fee accountancy packages to contractors and freelancers. Each client has unlimited access to their own dedicated approachable and friendly accountant. All Orange Genie Accountancy accountants are specialists in the contracting market, so they can give you bespoke, high quality advice.
We will always keep you informed about anything that could affect you and your company. Our relationships with our clients are extremely important to us so we'll be in touch often, whether it be face to face, over the telephone or email.
Our packages start at £75 + VAT a month for an online service. Our most popular package is £120 + VAT a month which provides you with your very own dedicated accountant as well as:
Unlimited accountancy support
Face to face meetings so we can get to know you and understand your contracting goals
Proactive contact
Director and employee payroll
Annual Return
Self-Assessment Return
A fully compliant service so you are safe in the knowledge that you are meeting your legal obligations
And much more, including access to wealth management advice, IR35 reviews and pensions planning.
If you would like to appoint Orange Genie Accountancy as your accountants please either fill out our enquiry form or give one of our friendly expert accountants a call on 01296 468 185 or email accountancy@orangegenie.com.