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.

£130,000 PSC Contract: IR35 Deemed Payment 2026/27

A Personal Service Company that receives £130,000 of IR35-caught contract income in the 2026/27 tax year, with no salary drawn and no allowable expenses, runs a Chapter 8 ITEPA deemed payment of £108,043 on top of £15,457 of employer Class 1 NIC. The worker keeps £71,614 after PAYE Income Tax and Class 1 employee NIC - an effective rate of 39.9% of contract income lost to UK tax. Verified against ITEPA 2003 Chapter 8.

Worker take-home

£71,614

Monthly £5,968

Deemed payment

£108,043

Treated as salary paid 5 April

Total UK tax cost

£51,886

PAYE + EE NIC + ER NIC

Step-by-step deemed payment on £130,000

Take the PSC's contract income (excluding VAT): £130,000.
Deduct the 5% standard allowance for running the PSC: £6,500. Remaining: £123,500.
Deduct allowable expenses from the ITEPA s.54 statutory list: employer pension contributions, mileage at AMR rates, professional subscriptions, temporary-workplace travel and subsistence, capital-allowance equivalents. In this default scenario the worker has not claimed any so the deduction is £0.
Deduct salary already paid to the worker during the year, plus employer NIC on it. In this default scenario the worker drew no salary so both are £0 (a £12,570 salary would deduct another £13,705.50 from the pot).
Residual pot to be paid as the deemed payment plus employer NIC on the deemed payment: £123,500.
Solve the gross-up: deemed = (pot + ST × rate) / (1 + rate). At 2026/27 rates (Secondary Threshold £5,000, employer NIC rate 15%) this gives a deemed payment of £108,043 and employer NIC on it of £15,457.
Tax the worker on the deemed payment via PAYE: £32,258 Income Tax and £4,171 Class 1 employee NIC, leaving a net take-home of £71,614 for the year.

Five scenarios at £130,000

How drawing a salary, routing pension contributions, switching region, or losing the 5% standard allowance changes the deemed-payment maths. Adjust the values interactively on the main calculator.

Scenario	Deemed payment	Total Er NIC	PAYE + EE NIC	Take-home	Effective rate
Default (England, no salary) 5% allowance, no expenses, full deemed payment	£108,043	£15,457	£36,429	£71,614	39.9%
Scotland Same setup, Scottish income-tax bands	£108,043	£15,457	£40,333	£67,711	42.9%
PA salary £12,570 Worker draws PA-sized salary during the year	£96,126	£14,804	£36,834	£71,862	39.7%
PA salary + £20k employer pension Pension contribution deductible in Step 3	£78,734	£12,196	£27,790	£63,514	30.8%
Public-sector (no 5% allowance) Pre-Chapter-10 scenario; allowance removed	£113,696	£16,304	£39,934	£73,762	43.3%

Your salary in context

ONS · HMRC · CPI

Worker take-home

On a £130,000 contract income, the deemed payment is £108,043 and the worker keeps £71,614 (£5,968 per month) - an effective rate of 39.9% of contract income lost to PAYE, employee NIC, and employer NIC combined.
Employer NIC bite

The PSC pays £15,457 of employer Class 1 NIC across the salary drawn and the deemed payment. At the 2026/27 rate of 15% above the £5,000 Secondary Threshold, employer NIC is one of the largest single deductions in the Chapter 8 computation.
5% allowance value

The 5% standard allowance is worth £2,148 of after-tax take-home at this contract level. Without it (public-sector engagements pre-Chapter-10) the worker would keep £73,762 instead of £71,614.
Tax breakdown

Income Tax (PAYE): £32,258; Class 1 employee NIC: £4,171; total employer NIC: £15,457. For every £100 of contract income, the worker keeps £55 after all UK taxes.

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Related calculators

IR35 Deemed Payment calculator - change contract income, salary drawn, expenses, region, year.
Contractor (IR35) calculator - for Chapter 10 off-payroll engagements where the end-client determines status and deducts PAYE at source.
Corporation Tax calculator - the deemed payment is deductible for CT purposes so most pure inside-IR35 PSCs retain little or no CT-taxable profit.
Self-employed calculator - the alternative trading vehicle if you wind up the PSC after an inside-IR35 reclassification.

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.