What Is a Deemed Employment Payment Under Off-Payroll Rules?

What a deemed employment payment is under the off-payroll rules

If you contract through your own limited company and work on an engagement where the client has determined the off-payroll rules apply, you'll come across the term "deemed employment payment" (HMRC also calls it the "deemed direct payment" in its legislation). This article explains what it means, how it's worked out, and who is responsible for the tax and National Insurance on it.

This is general education on how the mechanism works. It is not a statement about your own contract or your own IR35 status, which depends entirely on your actual working practices. For that, speak to a qualified IR35 contract reviewer or contractor accountant.

Why the deemed employment payment exists

The off-payroll working rules apply when a client (a public authority, or a medium or large private-sector organisation) states that a particular engagement falls inside IR35. In HMRC's guidance, this happens where the client says the off-payroll rules apply and the worker's intermediary, typically a personal service company, receives payment for the work, which is then used to calculate the deemed employment payment (Off-payroll working for intermediaries; Understanding off-payroll working (IR35)).

It's worth stressing: this is the client's determination, made via a Status Determination Statement, not a judgement made by this platform or by any job board. Nothing here amounts to us saying a role "is" or "is not" inside or outside IR35. Where you see a listing describe a contract as the client stating it sits outside IR35, that description reflects the client's own SDS, not independent verification.

Where a client's SDS puts an engagement inside the off-payroll rules, income tax and National Insurance need to be accounted for as though the worker were an employee for that engagement. The mechanism for doing this is the deemed employment payment, sometimes referred to in HMRC's legislation as the "deemed direct payment" for Income Tax purposes and "deemed direct earnings" for NICs purposes, both dating from 6 April 2021 for the private and third sectors (ESM10019).

How HMRC says the calculation works

HMRC's guidance on calculating the deemed employment payment sets out a specific sequence (How to calculate the deemed employment payment; ESM9070):

• Start with the income the intermediary received from off-payroll engagements in the tax year, including any non-cash benefits.
• Deduct a flat 5% for general business expenses.
• Deduct direct costs of materials and certain expenses the intermediary has met, where these qualify.
• If what's left is nil or a negative figure, there is no deemed employment payment for that engagement.

What remains after these deductions is treated as earnings from employment, and PAYE must be operated on it (ESM10017; Understanding off-payroll working (IR35)).

Who actually deducts the tax: the fee-payer

The party responsible for operating PAYE on the deemed employment payment is usually referred to as the fee-payer or deemed employer. HMRC's guidance on fee-payer responsibilities explains that this is generally the organisation that pays the worker's intermediary directly, whether that's the end client or an agency in the supply chain (Fee-payer responsibilities under the off-payroll working rules).

HMRC's Employment Status Manual confirms that the client, or another qualifying person further along the contractual chain, can be the deemed employer depending on how the chain is structured. Whoever holds that role is responsible for deducting Income Tax and employee National Insurance contributions from the deemed employment payment, and for accounting for employer NICs and the apprenticeship levy where due (ESM10002; ESM10019).

In practice, this means that when an engagement is treated as inside the off-payroll rules, the limited company doesn't receive its invoice value gross. The fee-payer deducts PAYE and employee NICs before paying the contractor's company, and separately accounts for employer NICs and any apprenticeship levy liability.

What this means for status reasoning

None of the above tells you whether a given engagement should be inside or outside the off-payroll rules in the first place. That question turns on the actual working arrangement, particularly the right of substitution and the degree of control the client exercises over how, when and where the work is done, principles reinforced by the Supreme Court in the PGMOL case on mutuality of obligation and status. HMRC's own CEST tool can help structure that thinking, but its output is not determinative on its own; it is one input among several, and an SDS or independent contract review is evidence the client has provided, not proof of status.

If you're assessing engagements or comparing rates, our outside-IR35 job listings and day-rate benchmarks may help you compare how different clients are framing their determinations, alongside our other guides on substitution, control and SDS documentation.

For anything involving employment rights concerns arising from how an engagement is run, the relevant regulator is the Fair Work Agency, not this platform.

This platform does not determine, verify, or warrant IR35 status; the SDS is the client's legal responsibility. Contractors should take their own advice and consider IR35 insurance.