How the Fee-Payer Handles Tax and NIC Inside IR35

How the fee-payer handles tax and NIC on an inside-IR35 contract

If a client determines that an engagement falls inside IR35 (via a Status Determination Statement, or SDS), tax does not stop being your limited company's problem in the abstract, but the mechanics of collecting it change substantially. Instead of your company invoicing gross and dealing with Corporation Tax and dividends in the usual way, PAYE is operated on the payment before it ever reaches your company. Understanding who does what, and why, helps you reconcile your contract rate against what actually lands in your business bank account.

Who is the fee-payer?

The "fee-payer" is HMRC's term for whichever party in the contractual chain pays the worker's intermediary directly. This could be the end client itself, or it could be an agency or umbrella sitting between the client and your limited company. HMRC's guidance on fee-payer responsibilities confirms that, normally, the obligation to deduct tax and National Insurance sits with whichever entity makes that final payment to the intermediary, not with the end client further up the chain.

This matters because on a contract where the client states the engagement is inside IR35, it is the fee-payer, not your own accountant, who becomes responsible for running payroll on the money paid for your services.

What the fee-payer actually deducts

Where the off-payroll working rules apply, the payment made to your intermediary is treated as a deemed direct payment of employment income. HMRC's Employment Status Manual explains that PAYE and National Insurance contributions (NICs) should be operated on this deemed payment as though it were a salary. In practice, the fee-payer:

• Deducts employee Income Tax under PAYE from the amount due to your intermediary
• Deducts employee NICs from the same payment
• Pays both of these amounts to HMRC on your behalf

This is confirmed in HMRC's off-payroll working guidance for intermediaries and contractors, which sets out that where the rules apply, Income Tax and employee NICs are deducted from payments for the worker's services before the balance reaches the intermediary.

Employer NICs and Apprenticeship Levy: paid on top, not deducted

This is the point that catches many contractors out when comparing an inside-IR35 day rate against an outside one. HMRC is explicit that the fee-payer must also pay employer NICs, and Apprenticeship Levy where applicable, to HMRC. Crucially, these employer costs cannot legally be deducted from the payment due to your intermediary. They must be paid by the fee-payer on top of that payment.

In practice, however, agencies and clients often build their expected employer NIC and levy costs into the contract rate they offer for an inside-IR35 role before it is ever quoted to you. This is a commercial pricing decision made upstream, not a deduction from your invoiced amount, but it is worth understanding when you compare rates across roles. Our day-rate benchmarks can help you see how inside and outside rates typically compare across sectors.

Why this differs from a standard limited company invoice

On a genuinely outside-IR35 engagement, as the client determines it to be, your limited company invoices gross, and you manage Income Tax and NICs yourself through salary and dividends, subject to Corporation Tax first. On an inside-IR35 engagement, the fee-payer intercepts the tax and NIC before you see the money, and what lands in your company bank account has already had employee Income Tax and employee NICs stripped out. Your limited company still receives a payment, and you'll typically get a payslip from the fee-payer showing the deductions, but there is no further employee NIC or Income Tax to run through the company on that income.

Where status determinations come from

None of this changes how status itself is decided. Whether a contract sits inside or outside IR35 depends on the actual working practices, particularly the right of substitution and the degree of control the client exercises, rather than on any assumption about mutuality of obligation. The end client is legally responsible for producing the SDS, and HMRC's Check Employment Status for Tax (CEST) tool results are not determinative; HMRC itself treats CEST as one input, not a final answer. An SDS, or a contract review commissioned by the client, represents evidence provided by the client, not verification by any third party or platform.

If a listing states the role is outside IR35, that is the client's claim, based on their own assessment of the working arrangements, and it can be revisited if practices change during the contract. For a wider view of live opportunities, you can browse outside-IR35 contracts on the board, but always check the specific SDS attached to a role rather than relying on the headline label.

If you believe your working rights are being affected inappropriately as an inside-IR35 contractor, for example around holiday pay or agency worker status, the relevant body to contact is the Fair Work Agency (FWA), which enforces employment rights, rather than HMRC, which deals only with tax status.

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.