IR35 - 04.01.2024

Extracting income from your company where IR35 applies

PAYE tax and NI

As you’re probably aware, the IR35 and off-payroll rules can apply to income derived from services provided by an individual through an intermediary, typically a company, that’s owned or controlled by the individual. Where these rules apply, either the business receiving the services or the intermediary must treat the income as if it were derived from employment and deduct PAYE tax and NI accordingly. Although the income is treated as if it were earnings, it also counts as taxable income for the intermediary.

Trap. The double accounting can result in tax being payable twice on the same income.

Example. Arnie’s company, Acom Ltd, provides his services as a consultant to its only client. The IR35 /off-payroll rules apply and so PAYE tax and NI is accounted for on the income. In Acom’s financial year ended 31 March 2024 the income was £95,000. In 2023/24 Arnie draws £9,000 from Acom as salary and £50,000 as dividends. He’s taxed on the salary, but any PAYE tax and NI payable on it has already been accounted for under the IR35 /off-payroll rules. However, Arnie is liable to a separate income tax charge on the dividend income even though PAYE tax has been deducted from it.

Tip. If Arnie did nothing the double tax charge would stick. However, he can easily avoid it by claiming a special deduction through his self-assessment tax return or by making a standalone claim (see The next step ).

Effect on income

The special deduction reduces the amount of dividends on which Arnie pays tax. In our example all of Acom’s £95,000 of income was subjected to PAYE tax and so Arnie can claim the special deduction on the full £50,000 of it he took from the company as dividends. His taxable dividend income for 2023/24 is therefore zero. If Arnie takes the remainder of the £95,000 as dividends (the amount he can take will actually be less because Acom will use some of it to meet its costs), he could make another claim for relief for up to £45,000 (or less depending on Acom’s costs).

Trap. The claim to prevent double taxation of dividend income only cures part of the tax problem that can result where PAYE tax and NI are deducted from income under the IR35 /off-payroll rules. The company’s corporation tax (CT) position also needs to be considered.

The company’s position

Companies can deduct any salaries they pay when working out the profits on which they pay corporation tax (CT). In our example Acom only paid £9,000 salary to Arnie in its financial year to 31 March 2024. The other payments to him were dividends, which aren’t deductible for CT. This means under the normal CT rules Acom could only claim a deduction for £9,000, even though £95,000 had in effect been taxed as salary.

Tip. To obtain CT relief for the full £95,000, Acom must submit another type of special claim (with its self-assessment return) to HMRC (see The next step ).

For a sample election to prevent double taxation and for one to claim CT relief, visit https://www.tips-and-advice.co.uk , Download Zone, year 24 issue 7.