When does the Chapter 8 deemed payment apply, not the off-payroll working rules?

The Chapter 8 ITEPA deemed-payment calculation applies when the PSC itself determines that the contract is inside IR35. That only happens for engagements with small private-sector end-clients - those that meet at least two of the three Companies Act 2006 small-company tests (turnover below £10.2m, balance-sheet total below £5.1m, fewer than 50 employees). For medium and large private-sector clients (since April 2021) and all public-sector clients (since April 2017), the Chapter 10 off-payroll working rules instead push the status determination - and the PAYE+NIC deduction - onto the end-client or fee-payer. In those cases the PSC receives a payment already net of tax and no deemed-payment computation is required.

What is the 5% standard allowance?

The deemed-payment calculation lets the PSC deduct a flat 5% of its IR35-caught contract income as a notional allowance for the costs of running the company - office, accountancy, insurance, training, and similar costs that are not separately deductible in the deemed-payment list. The allowance was removed for public-sector engagements from April 2017 (and is irrelevant under Chapter 10 anyway), but it survives for the Chapter 8 small-private-client cases that still use the deemed-payment route. Set the calculator's 'apply 5% allowance' toggle to off only if your engagement falls outside that surviving scope.

Which expenses can the PSC deduct in the deemed-payment computation?

ITEPA 2003 s.54 gives a limited statutory list, not the usual broad business-expense definition: (1) employer pension contributions made for the worker; (2) expenses the worker could have claimed as employee deductions if they had been a direct employee of the client - mainly travel to a temporary workplace (subject to the 24-month rule), professional subscriptions on HMRC List 3, business mileage at AMR rates, and tools or equipment used wholly for the engagement; (3) capital-allowance equivalents on plant and machinery used in the engagement. General overheads (rent, broadband, software subscriptions) are NOT deductible here - they are covered by the 5% standard allowance.

Why is employer NIC added on top of the deemed payment?

Because the deemed payment is treated as if it were a salary paid to the worker on 5 April, employer Class 1 secondary NIC applies to it. The arithmetic is fiddly because employer NIC is itself a cost the PSC has to find from contract income - so the final figures are determined by solving a small simultaneous equation: pot = deemed + (deemed - secondary threshold) x employer NIC rate. The calculator does that gross-up automatically. At 2026/27 rates (15% above a £5,000 secondary threshold) the deemed-payment-plus-employer-NIC bite typically takes 60-70% of contract income at higher-rate levels, which is why outside-IR35 status (where it exists genuinely) is so financially material.

How does drawing a salary during the year change the deemed payment?

Any salary the PSC pays the worker during the tax year is deducted in Step 4 of the deemed-payment computation. That salary has already gone through PAYE + employee NIC + employer NIC at the time it was paid, so it is not double-taxed. The arithmetic effect is to shift tax from the year-end deemed-payment lump sum onto the monthly payroll - the total tax bill ends up almost identical at any given salary level, but cashflow improves because HMRC receives payments through the year rather than as a single 19 April balancing payment. Practical caveat: drawing a salary above the Personal Allowance loses the relative efficiency advantage Chapter 8 once offered, so most inside-IR35 PSCs either run zero salary or a £12,570 PA-sized salary depending on whether the worker has other PAYE income.

When is the deemed payment due to HMRC?

The deemed payment is treated as if paid on 5 April (the last day of the tax year). PAYE and NIC on it are due by 19 April (or 22 April for electronic payments) - just two weeks after year-end. Provisional payments can be made during the year if the PSC chooses, with a final balancing adjustment after 5 April. HMRC's ESM3160 manual page covers the mechanics. Late payment attracts interest at the standard HMRC late-payment rate (Bank of England base rate plus 2.5%) and, beyond 30 days late, late-payment penalties starting at 5% of the unpaid amount.

Does the deemed payment count as Corporation Tax deductible expenditure?

Yes - the deemed payment (and the employer NIC on it) are treated as employment costs of the PSC and are deductible in computing the company's Corporation Tax profits, just like any other employee remuneration. In most pure-IR35 PSCs the deemed payment plus drawn salary plus employer NIC equals all the company's revenue net of allowable expenses, so the residual taxable profit is roughly nil and no Corporation Tax is due. If the PSC retains profit for any reason (rare under Chapter 8), Corporation Tax applies to that residue at the standard rates.

UK IR35 Deemed Payment Calculator 2026/27

Run the Chapter 8 ITEPA 2003 deemed-payment calculation for a Personal Service Company inside IR35 - the year-end computation that still applies when your PSC determines its own status for a small-private-sector engagement. Covers the 5% standard allowance, allowable expenses, salary already drawn, and the employer NIC gross-up on the deemed payment. Verified against ITEPA 2003 Part 2 Chapter 8 and the HMRC Employment Status Manual.

Worked scenarios for 2026/27

£70k contract, no salary drawn

£44,475 take-home

Deemed £58,478 - Er NIC £8,022
£100k contract, £12,570 PA salary

£59,227 take-home

Deemed £71,343 - Er NIC £11,087
£100k contract, £20k pension routed via PSC

£49,140 take-home

Deemed £53,952 - Er NIC £8,478
£150k contract, £12,570 PA salary

£78,152 take-home

Deemed £112,647 - Er NIC £17,283
£200k contract, additional-rate territory

£100,043 take-home

Deemed £153,952 - Er NIC £23,478
£100k contract, public-sector (no 5% allowance)

£61,370 take-home

Deemed £87,609 - Er NIC £12,391

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What the IR35 deemed payment is

The IR35 deemed payment is the year-end calculation that a Personal Service Company (PSC) makes when a contract it has worked on is inside IR35 and the PSC itself is responsible for the status determination. It is set out in Chapter 8 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003 - the original IR35 regime introduced in April 2000 that gave the rules their nickname (Inland Revenue press release “IR35” of 1999).

The mechanics treat the IR35-caught contract income as if it had been paid to the worker as a salary on 5 April. Income Tax and Class 1 NIC are then computed on that “deemed payment” and paid to HMRC by 19 April. The worker ends up with broadly the same after-tax position they would have had as a direct employee of the end client - which is the policy intent of IR35 (preventing disguised employment through interposing a limited company).

When Chapter 8 applies vs Chapter 10 off-payroll working

The IR35 landscape has two distinct regimes since the off-payroll working reforms. Knowing which applies to your contract is the first step in any IR35 calculation.

Chapter 8 (the deemed-payment route - this calculator)

Chapter 8 applies when the PSC itself decides the engagement is inside IR35. After the April 2017 and April 2021 reforms, that responsibility only survives for engagements with small private-sector end-clients. “Small” follows the Companies Act 2006 test: the end-client meets at least two of:

annual turnover £10.2 million or less
balance-sheet total £5.1 million or less
50 employees or fewer

If your end-client meets the small-company test, your PSC determines its own IR35 status. If you decide the contract is inside IR35, you run the Chapter 8 deemed-payment calculation in this calculator at year-end.

Chapter 10 (off-payroll working - separate calculator)

Chapter 10 applies when the end-client is medium or large private sector (since April 2021) or any public-sector body (since April 2017). In that case the end-client - or whoever pays the PSC’s fee (the “fee-payer”, often a recruitment agency) - is responsible for:

Issuing a Status Determination Statement (SDS) to the PSC and every party in the labour-supply chain.
If the SDS says inside IR35, deducting PAYE Income Tax and Class 1 employee NIC from the gross fee before paying the PSC.
Paying the corresponding employer NIC on top.
Paying the Apprenticeship Levy (if applicable) on the deemed earnings.

The PSC receives an already-taxed payment and does no deemed-payment computation. Off-payroll cases are modelled by our Contractor calculator instead, using the inside-IR35 mode.

If you are not sure which regime applies, run HMRC’s Check Employment Status for Tax (CEST) tool. CEST is the official status checker; a CEST result supports your treatment even if HMRC later opens an enquiry, provided the answers were honest.

The eight-step deemed-payment calculation

ITEPA s.54 sets out the calculation in eight numbered steps. The calculator above runs every step automatically; below is the same arithmetic in long form so you can sanity-check the result against your accountant’s working paper.

Step 1 - take contract income

Take the total contract income received by the PSC in the tax year from IR35-caught engagements, excluding VAT. If you are on the Flat Rate VAT scheme the surplus you retain (the difference between the 20% charged and the lower flat rate paid over) is income for IR35 purposes and goes into Step 1 as well.

Step 2 - deduct the 5% standard allowance

Deduct 5% of the Step 1 figure as a standing allowance for running the PSC. The allowance covers all the general overheads that are not separately deductible in Step 3 - office, broadband, software, insurance, accountancy, training, light marketing.

The 5% allowance was removed for public-sector engagements from April 2017 (irrelevant under Chapter 10 anyway). If you tick the “no 5% allowance” toggle in the calculator that scenario is modelled. Otherwise the default 5% applies.

Step 3 - deduct allowable expenses

Deduct expenses that an employee in the same role could have claimed if they had been a direct employee of the end-client. The statutory list is narrow, not the broad business-expense list a contractor uses for Corporation Tax:

Employer pension contributions the PSC made for the worker - often the single largest item and the main reason an inside-IR35 contractor would route extraction through pension rather than salary.
Travel and subsistence under the temporary-workplace rules - workings between home and a temporary workplace (one that the worker is at for less than 24 months in the same engagement, or that represents less than 40% of their working time). Subject to the 24-month rule, which is a frequent enquiry point.
Business mileage at HMRC Approved Mileage Rates (45p / 25p over 10,000 miles for cars).
Professional subscriptions on HMRC’s List 3 (the list of approved professional bodies whose fees qualify for income-tax relief).
Tools and equipment used wholly for the engagement, and the capital-allowance equivalent on plant and machinery (treat as if the worker were an employee claiming a notional capital deduction).

General business overheads do not appear in Step 3 - they are covered by the 5% standard allowance in Step 2. Treat the Step 3 list as the limit, not as a starting point.

Step 4 - deduct salary already paid

Deduct the gross salary and benefits in kind the PSC paid the worker during the tax year. PAYE and Class 1 employee NIC will already have been deducted from that salary in real time, so the worker is not double-taxed - it just reduces what remains to be taxed via the deemed-payment route.

In practice most Chapter 8 PSCs draw either zero salary (because the worker has another PAYE income that uses the Personal Allowance) or a PA-sized salary of £12,570 (when there is no other PAYE income; £12,570 uses up the full Personal Allowance and incurs minimal Class 1 NIC). Higher salary levels are technically allowed but reduce the incidence of the deemed payment, which is essentially neutral - the total tax bill is similar either way.

Step 5 - deduct employer NIC on the salary

Deduct the employer’s Class 1 secondary NIC the PSC paid on the Step 4 salary. At 2026/27 rates this is 15% of any salary above the £5,000 Secondary Threshold. A £12,570 salary triggers (£12,570 - £5,000) × 15% = £1,135.50 of employer NIC.

Step 6 - compute the residual pot

What remains after Steps 1-5 is the “pot” that needs to be paid out as a deemed payment, gross of the employer NIC due on the deemed payment itself.

Step 7 - gross up the employer NIC

This is the arithmetically fiddly bit. The deemed payment is itself subject to employer NIC, and that NIC is paid out of the pot - so you need to solve simultaneously for “deemed payment” and “employer NIC on the deemed payment”:

pot = deemed + max(0, deemed - secondary threshold) x employer NIC rate

Rearranging (assuming deemed > secondary threshold):

deemed = (pot + secondary threshold x employer NIC rate) / (1 + employer NIC rate)

At 2026/27 (ST £5,000, rate 15%) a £95,000 pot resolves to a deemed payment of (£95,000 + £750) / 1.15 = £83,260.87, and the employer NIC on it is (£83,260.87 - £5,000) × 15% = £11,739.13. Check: £83,260.87 + £11,739.13 = £95,000. The pot is exhausted.

The calculator runs this algebra exactly; if the implied deemed payment falls below the Secondary Threshold the algebra reduces to deemed = pot and there is no employer NIC component.

Step 8 - tax the worker

The worker pays Income Tax and Class 1 employee NIC on the total of (salary actually drawn) + (deemed payment), calculated against the same Personal Allowance and band schedule that any PAYE employee would face. Scotland, England, Wales, and Northern Ireland use their respective income-tax bands. NIC is UK-wide.

When does outside-IR35 still make financial sense?

Inside IR35 - even via Chapter 8 - largely strips out the tax advantage that the limited-company route used to confer. Two reforms in particular narrowed the gap:

April 2024 NIC cuts: Class 1 employee NIC fell from 12% to 8%; Class 4 self-employed NIC fell from 9% to 6%. The dividend route loses a little advantage but the PAYE route gains more.
April 2023 Corporation Tax reform: Small-profits rate stays at 19% up to £50,000 but the marginal effective rate in the £50,000-£250,000 band is 26.5%. Larger PSCs see a meaningfully higher CT charge.

Combined with the deemed-payment computation taking 60-70% of contract income at higher-rate levels, the financial argument for sustaining a PSC purely to operate inside-IR35 contracts has largely disappeared. Most inside-IR35 contractors either:

Close the PSC and trade through an umbrella company (which handles all PAYE in-house - simpler, similar net take-home).
Take a permanent role with the end-client - often a meaningful pay rise relative to the inside-IR35 net.
Use the PSC only for genuinely outside-IR35 future engagements, retaining the limited-company structure for those.

The remaining strong cases for keeping a PSC alive while running inside- IR35 work are: significant employer pension contributions (still deductible in Step 3), a portfolio of contracts of mixed status where the limited-company structure suits the outside-IR35 ones, or a short-term inside-IR35 contract bridging a longer-term outside-IR35 pipeline.

Status determination - the underlying tests

Whether a contract is inside or outside IR35 turns on the same tests HMRC applies to any employed-vs-self-employed dispute. The three “primary” pillars come from the Ready Mixed Concrete case (1968) and have been refined through later case law:

Personal service - does the worker have to do the work themselves, or can they send a substitute? A genuine, unrestricted right to substitute (with the PSC paying the substitute) is a strong outside-IR35 indicator. A right of substitution that the end-client can veto is weak.
Mutuality of obligation - is the client obliged to offer continuous work and the worker obliged to accept it? Open-ended “rolling” engagements with implicit continuity look more like employment.
Control - does the client direct how, when, where, and what the worker does? An outside-IR35 contractor sets their own approach and methods, often working from their own premises and using their own equipment.

Secondary indicators include financial risk (the contractor’s exposure to bad debt, faulty work, and equipment), provision of equipment, the right to profit from sound management of the contract, and whether the worker is “part and parcel” of the client’s organisation (named on the intranet, attending team socials, taking line-management responsibility for client staff).

HMRC’s CEST tool encodes a simplified version of these tests. Honest answers and a CEST printout dated to the contract start are a solid defence in any later HMRC enquiry.

Penalties for getting it wrong

Where HMRC successfully reclassifies a Chapter 8 contract as inside IR35 after the worker treated it as outside, the back-tax bill plus interest plus penalties can be eye-watering:

Back-tax - the full deemed-payment liability for every open tax year (normally up to four years for non-deliberate errors, six for carelessness, 20 for deliberate concealment).
Interest - HMRC’s late-payment interest rate, currently Bank of England base rate plus 2.5%.
Penalties - 0% for reasonable care, 15-30% for carelessness, up to 100% of the tax for deliberate concealment under Schedule 24 Finance Act 2007. Penalties are often reduced for full unprompted disclosure and cooperation.

Spot-check the documentation: keep the contract, the working-practices statement, the CEST printout if used, and any correspondence with the end-client confirming working practices. These are the artefacts HMRC asks for in any enquiry.

Contractor calculator - inside vs outside IR35 take-home for a day-rate contract, including the Chapter 10 off-payroll path most contractors now follow.
Corporation Tax calculator - the small / marginal / main-rate structure post-April 2023.
Self-employed tax calculator - the alternative trading vehicle if you wind up the PSC.
Capital Allowances calculator - AIA, FYA, and writing-down allowances on equipment used in engagements.
IR35 explained guide - longer-form background on the status tests and case law.
Sole Trader vs Limited Company 2026/27 - the post-2024 NIC and CT picture comparing the two routes.

Sources verified 2026-05-22:

ITEPA 2003 Part 2 Chapter 8 - legislation.gov.uk
HMRC Employment Status Manual ESM3000 series - gov.uk/hmrc-internal-manuals/employment-status-manual/esm3000
Understanding off-payroll working (IR35) - gov.uk/guidance/understanding-off-payroll-working-ir35
Check Employment Status for Tax (CEST) - gov.uk/guidance/check-employment-status-for-tax

Frequently asked questions

When does the Chapter 8 deemed payment apply, not the off-payroll working rules?: The Chapter 8 ITEPA deemed-payment calculation applies when the PSC itself determines that the contract is inside IR35. That only happens for engagements with small private-sector end-clients - those that meet at least two of the three Companies Act 2006 small-company tests (turnover below £10.2m, balance-sheet total below £5.1m, fewer than 50 employees). For medium and large private-sector clients (since April 2021) and all public-sector clients (since April 2017), the Chapter 10 off-payroll working rules instead push the status determination - and the PAYE+NIC deduction - onto the end-client or fee-payer. In those cases the PSC receives a payment already net of tax and no deemed-payment computation is required.
What is the 5% standard allowance?: The deemed-payment calculation lets the PSC deduct a flat 5% of its IR35-caught contract income as a notional allowance for the costs of running the company - office, accountancy, insurance, training, and similar costs that are not separately deductible in the deemed-payment list. The allowance was removed for public-sector engagements from April 2017 (and is irrelevant under Chapter 10 anyway), but it survives for the Chapter 8 small-private-client cases that still use the deemed-payment route. Set the calculator's 'apply 5% allowance' toggle to off only if your engagement falls outside that surviving scope.
Which expenses can the PSC deduct in the deemed-payment computation?: ITEPA 2003 s.54 gives a limited statutory list, not the usual broad business-expense definition: (1) employer pension contributions made for the worker; (2) expenses the worker could have claimed as employee deductions if they had been a direct employee of the client - mainly travel to a temporary workplace (subject to the 24-month rule), professional subscriptions on HMRC List 3, business mileage at AMR rates, and tools or equipment used wholly for the engagement; (3) capital-allowance equivalents on plant and machinery used in the engagement. General overheads (rent, broadband, software subscriptions) are NOT deductible here - they are covered by the 5% standard allowance.
Why is employer NIC added on top of the deemed payment?: Because the deemed payment is treated as if it were a salary paid to the worker on 5 April, employer Class 1 secondary NIC applies to it. The arithmetic is fiddly because employer NIC is itself a cost the PSC has to find from contract income - so the final figures are determined by solving a small simultaneous equation: pot = deemed + (deemed - secondary threshold) x employer NIC rate. The calculator does that gross-up automatically. At 2026/27 rates (15% above a £5,000 secondary threshold) the deemed-payment-plus-employer-NIC bite typically takes 60-70% of contract income at higher-rate levels, which is why outside-IR35 status (where it exists genuinely) is so financially material.
How does drawing a salary during the year change the deemed payment?: Any salary the PSC pays the worker during the tax year is deducted in Step 4 of the deemed-payment computation. That salary has already gone through PAYE + employee NIC + employer NIC at the time it was paid, so it is not double-taxed. The arithmetic effect is to shift tax from the year-end deemed-payment lump sum onto the monthly payroll - the total tax bill ends up almost identical at any given salary level, but cashflow improves because HMRC receives payments through the year rather than as a single 19 April balancing payment. Practical caveat: drawing a salary above the Personal Allowance loses the relative efficiency advantage Chapter 8 once offered, so most inside-IR35 PSCs either run zero salary or a £12,570 PA-sized salary depending on whether the worker has other PAYE income.
When is the deemed payment due to HMRC?: The deemed payment is treated as if paid on 5 April (the last day of the tax year). PAYE and NIC on it are due by 19 April (or 22 April for electronic payments) - just two weeks after year-end. Provisional payments can be made during the year if the PSC chooses, with a final balancing adjustment after 5 April. HMRC's ESM3160 manual page covers the mechanics. Late payment attracts interest at the standard HMRC late-payment rate (Bank of England base rate plus 2.5%) and, beyond 30 days late, late-payment penalties starting at 5% of the unpaid amount.
Does the deemed payment count as Corporation Tax deductible expenditure?: Yes - the deemed payment (and the employer NIC on it) are treated as employment costs of the PSC and are deductible in computing the company's Corporation Tax profits, just like any other employee remuneration. In most pure-IR35 PSCs the deemed payment plus drawn salary plus employer NIC equals all the company's revenue net of allowable expenses, so the residual taxable profit is roughly nil and no Corporation Tax is due. If the PSC retains profit for any reason (rare under Chapter 8), Corporation Tax applies to that residue at the standard rates.