Detailed guide: Off-payroll working (IR35) in the public sector: pay an intermediary

Updated: Added an explanation of how to calculate the deemed direct payment.


The off-payroll working rules are in place to make sure that, where an individual would have been an employee if they were providing their services directly, they pay broadly the same tax and National Insurance contributions (NICs) as an employee.

In the public sector, the public authority is responsible for deciding if the off-payroll working rules apply to an engagement.

Where they do, the fee-payer (the public authority, agency or other third party who is responsible for paying the worker’s intermediary) must:

  • calculate a deemed direct payment to account for employment taxes associated with the contract
  • deduct those taxes from the payment to the worker’s intermediary
  • report to HM Revenue and Customs (HMRC) through Real Time Information (RTI) the taxes deducted
  • pay the relevant employers’ NICs

If the person paying the intermediary is outside of the UK, slightly different rules apply.

Calculate the deemed direct payment

The deemed direct payment is the amount paid to the worker that should be treated as earnings for the purposes of the off-payroll rules.

To calculate the deemed direct payment you must:

  1. Work out the value of the payment to the worker’s intermediary, having deducted any VAT due.
  2. Deduct the direct costs of materials that have, or will be used in providing their services.
  3. Deduct expenses met by the intermediary that would have been deductible from taxable earnings if the worker was employed.
  4. The resulting amount is the deemed direct payment. If it is nil or negative there is no deemed direct payment.

You then need to deduct tax and NICs, as appropriate, from the deemed direct payment.

You’ll need to report the pay and deductions you make to HMRC using a Full Payment Submission (FPS), as you do for workers on your payroll.

You must also pay employer Class 1 NICs due in respect of these engagements, and report them to HMRC.

You don’t have to add these workers to your existing payroll, but you can do this if you wish. If the payments are not reported under your existing PAYE scheme, then you’ll have to open a new one.

You should keep a record of the deemed direct payment, Income Tax and NICs deducted on a deductions working sheet.

Report information about the worker

You’ll need to report largely the same information as you do for your existing employees on a FPS. For existing contracts that become subject to the changes on 6 April 2017, you might need to get some additional information to complete a payroll submission for these workers.

Starter information

When you put the worker on your payroll you’ll need to send a start declaration to HMRC.

You can check which starter declaration you need to use.
As the worker will have a primary employment with their own intermediary, the services they provide to you are likely to be treated as a secondary employment.

If this is the case, you’ll normally need to use starter declaration C. This means you would initially use tax code BR and deduct tax at basic rate, until HMRC issues a different tax code.

Worker ID

You should assign a unique worker ID, using the Payroll ID data field. This will help HMRC and the worker to see which is their primary and secondary employment.

Office-holder status for NICs

The majority of these workers will be directors of their own limited companies, which makes them office holders in their own limited companies. That does not mean they are a director or office-holder in your organisation.

If the contract with the worker’s intermediary means the worker undertakes director or office-holder duties in your organisation, the income from that contract should be taxed as employment income and paid through your FPS. You’ll need to indicate director status for NICs on your FPS.

End of contract

At the end of the contract, you’ll need to:

  • report the date of leaving to HMRC
  • report to HMRC any payments made to the intermediary after that date
  • provide the worker with a P45 at the end of the contract

Apprenticeship Levy

As the fee-payer, you will be liable for paying Class 1 NICs on the payments to the worker’s intermediary. These payments will be included in your annual pay bill and be relevant for Apprenticeship Levy purposes.


There are a number of reporting fields that are not relevant for workers engaged through their own companies. These are:

  • Student Loan repayments
  • statutory payments
  • workplace pension payments

The worker will account for student loan obligations in their own tax returns or company payrolls. You should ignore any generic notification service messages you receive in relation to student loan repayments for these workers.

As the worker is not one of your employees, they are not entitled to statutory payments from you. The entitlement to statutory payments comes through their primary employment with their own company.

The worker is not subject to auto-enrolment into your workplace pension.

Source: HMRC

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