ESM10024 - off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: prevention of double taxation

Section 61W Chapter 10, Part 2 ITEPA 2003
Regulation 23 Social Security Contributions (Intermediaries) Regulations 2000

Where the worker receives a payment or benefit (known as the end-of-line remuneration in the legislation) from their intermediary AND

that end-of-line remuneration can reasonably be taken to represent remuneration for services of the worker to a public authority or medium or large-sized client not in the public sector AND

a deemed payment has been treated as paid to the worker AND

the recipient of the underlying chain payment has borne the costs of PAYE / NICs, then the worker can treat the amount of end-of-line remuneration as reduced (but not below nil) by any one or more of:

  • the amount of the deemed direct payment net of income tax and Class 1 NICs,
  • the amount of any Capital Allowances in respect of expenditure incurred by the paying intermediary that could have been deducted from employment income under section 262 Capital Allowances Act 2001 (PAYE purposes only), and
  • the amount of any contributions made, in the same year as the end-of-line remuneration is drawn, for the benefit of the worker, by the paying intermediary into a registered pension scheme which would otherwise not be chargeable to income tax as income of the worker (PAYE purposes only).

The underlying chain payment is the amount brought into Step 1 of the deemed direct payment calculation (ESM10028).

EXAMPLE

John’s PSC receives a VAT exclusive payment, net of tax and Class 1 National Insurance, of £5,800. £1,000 was deducted already by the deemed employer under PAYE for the tax and Primary Class 1 National Insurance so the PSC has borne the cost of the deductions. Therefore, John does not need to pay tax or NICs again on the end of line remuneration of £5,800. If any more tax is due, for example because of underpayment, this will be collected via John’s ITSA return.

The PSC can pay John a salary of £5,800 via a non-taxable and non-NICable payment in payroll, to ensure no more tax or NICs are deducted.

Alternatively, John could take £5,800 as dividends from the PSC and these dividends would not be subject to dividend tax.

The amount that can be paid to John without deducting tax and NICs by his PSC is limited to £5,800 as this was the amount of the deemed direct payment net of income tax and Class 1 NICs.

See ESM10030 for further information about the worker drawing money from their intermediary.

If John’s PSC were to make further payments of earnings to him, from payments not subject to Chapter 10, Part 2 ITEPA 2003, in the same period, these should be subject to tax and NICs.