Income Tax (Earnings and Pensions) Act 2003 section 54

Calculation of deemed employment payment

Section 54 sets out the step-by-step method for calculating the deemed employment payment that arises under the intermediaries legislation (commonly known as IR35) for a tax year.

• The calculation starts with the total payments and benefits received by the intermediary for the worker's engagements, reduced by a flat 5% allowance, then adds any relevant payments the worker received directly from the client that would have been taxable as employment income.
• Various deductions are then made: allowable employment expenses, capital allowances, employer pension contributions, employer's National Insurance contributions, and any salary or benefits already paid to the worker and taxed as employment income.
• If at any stage during the deductions the running total reaches nil or becomes negative, there is no deemed employment payment for the year.
• The final step strips out a notional amount of employer's National Insurance contributions from the remaining figure, and whatever is left is the deemed employment payment on which the worker must account for income tax and National Insurance.