IR35 - what is the 5% allowance?

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IR35 - what is the 5% allowance?

Posted Mar 10, 2010

If your IT contract work is caught by the IR35 rules, you will receive most of your income in the form of a 'deemed payment', net of a standard '5% allowance' to cover administrative expenses.

When calculating the IR35 deemed payment, income for each contract caught by the IR35 rules should be combined. The 5% allowance should be deducted from this total figure at the end of each year, before calculating your tax and national insurance liabilities.

You are not required to demonstrate expenditure, and can claim 5% regardless of your actual outlay for administrative costs.

Can you claim any additional expenses?

In addition to this 5% allowance, contractors caught by IR35 can still claim "Section 198" expenses, which include:

- Professional indemnity insurance, and other business insurances.
- Travel costs incurred solely for business purposes (subject to the "24 month rule")
- Executive or personal pension payments
- Subsistence when working away from home
- Professional subscriptions

You can find out more in HMRC's FAQ here, and ask your accountant if you have any questions about how the IR35 rules apply to you.

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