Tax calculation for a hourly contract rate of £27, working 37.5 hours per week, 44 weeks per year, generating annual billings of £44,550. Tax code 1250L; Fiscal Year 2019/2020
| Annual | Monthly | |
|---|---|---|
| Contractor fees ("deemed direct payment") | £44,550 | £3,712 |
| Agency/client employment taxes ("Fee-payer") | ||
| Employers National Insurance (N.I) @ (13.8%) | £4,956 | £413 |
| Apprenticeship Levy @ (0.5%) | £222 | £18 |
| Total hirer taxes | £5,179 | £431 |
| TOTAL COST TO HIRER (Annual) | £49,729 | £4,144 |
| TOTAL COST TO HIRER (equivalent rate) | £30 | £30 |
| Contractor taxes | ||
| Employees National Insurance (N.I) | £4,310 | £359 |
| Income Tax (PAYE) | £6,410 | £534 |
| Total contractor taxes | £10,720 | £893 |
| NET INCOME (pre expenses) | £33,829 | £2,819 |
| Total contractor expenses | £3,000 | £250 |
| NET INCOME (post expenses) | £30,829 | £2,569 |
This calculation is based on Chapter 10 of the Income Tax (Earnings and Pensions) Act 2017 (ITEPA) and titled
"Workers' services provided to public sector through intermediaries." This is colloquially referred to as "off-payroll" or "IR35 in the public sector."
Important note: The legislation and tax calculations are different to the Intermediaries legislation (original IR35 - April 2000 - Chapter 8 of ITEPA).
The key difference is that under "old" IR35 the employment taxes are paid by the contractor out of their contract earnings. This is not the case
for the new legislation. The contractors fees ("the deemed direct payment") is now treated like employment income. This means that the hirer's employment
taxes, namely Employers National Insurance and the Apprenticeship Levy are paid on top of the contractors rate. These amounts cannot be deducted
from the contractors agreed contract rate, otherwise it is an unlawful deduction from wages.
The deemed direct calculation is defined in
section 61Q of chapter 10
of ITEPA 2017
, and means that the contractors earnings should be treated as if they are like an employed salary. As stated above, this means employees NI and
PAYE are deducted from the contractors rate and that the fee-payer (client or agency) must pay employers NI and App Levy on top of the earnings paid to the contractor.
Note for agencies: Rates for "inside IR35" when off-payroll (Chapter 10) is used need to be quoted after employment taxes have been taken into account.
Agencies using umbrella companies for payroll services need to pass the contractors fees to the umbrella and the additional employment taxes, to ensure
full compliance with all relevant legislation.
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