Calculating your salary under IR35
IR35 states that: ‘If through your company you are doing the sort of work for your (ultimate) client that would normally be undertaken by an employee working directly for that client, then 95% of the income (both fees and expenses) received by your company during the tax year, excluding VAT, must be paid in that tax year, as salary and employer’s national insurance contribution, to you the individual earning those fees.’ The calculation must be based on your total income (fees and expenses) and from this 95% figure certain permissible expenses may be deducted. The resulting figure is the total of salary and employer’s national insurance contribution for the period.
To arrive at the amount that must be devoted to paying your salary, you deduct the following expenses from the money received in respect of relevant engagements:
- 5% of both the fees received for the relevant contracts and the expenses you have charged your client in relation to these fees. This is intended to cover the various miscellaneous expenses of running your company, including accountancy fees, training and the cost of seeking contracts.
- Any employer pension contributions made to an approved scheme which are allowable under normal rules.
- Professional indemnity insurance premiums.
- Capital allowances in respect of computer equipment purchased by your company. Although you may not claim a deduction for the cost of purchasing your own equipment if your client provides you with all the equipment that you require (even if your contract states that you should own your own equipment), expenditure on computers and computer software up to £50,000 per year qualifies for full capital allowances. We therefore take the view that you may claim the entire cost of computer equipment as a deduction in the IR35 calculation.
- Professional subscriptions to, and levies of, societies where related to the engagement. This does not include accountancy fees (see below).
- Certain benefits in kind (e.g. private medical insurance), on which employer’s national insurance is payable.
- Because of the difficulty in calculating the exact costs of electricity, water and gas used for business purposes, HMRC permits a claim of £18 per month for use of your home. This can be claimed without need for receipts and proof of substantive duties.
Remember that accountancy fees and travel expenses not specifically related to the paying client are covered by the 5% allowance and cannot be treated as a deduction. The cost of training is also specifically excluded from the formula.
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