IR35 Explained: Inside vs Outside in Plain English
IR35 is the rule HMRC uses to decide whether a contractor is genuinely running their own business or is effectively an employee of the end client in all but name. Your status changes how much tax you pay on the same day rate:
- Outside IR35: you operate through your own limited company. Profit pays 19–25% corporation tax, and you take a small director salary topped up with dividends (taxed at 8.75%/33.75%/39.35%). Total effective tax is typically ~28–35%.
- Inside IR35: the income is treated as employment earnings. PAYE income tax, employee National Insurance and — through the contract chain — employer National Insurance all apply, so there is little tax benefit to using a company. Total effective tax is typically ~40–48%.
Worked Example: a £500/day Contract (2026/27)
Take the calculator's default scenario — a £500 day rate over 220 working days (£110,000 gross), a £9,100 director salary, £100/month of business expenses and a £25/week umbrella margin. Here is how the two routes compare on 2026/27 rates:
| Step | Outside IR35 (Ltd) | Inside IR35 (Umbrella) |
|---|---|---|
| Gross annual contract | £110,000 | £110,000 |
| Corporation tax | −£22,508 | — |
| Employer NI | (on salary only) | −£15,555 |
| Dividend tax | −£15,080 | — |
| Income tax + employee NI | ≈ £0 on £9,100 salary | −£28,564 |
| Net take-home | £70,597 (64.2%) | £64,582 (58.7%) |
The outside-IR35 advantage here is about £6,000 (≈9% more take-home) — noticeably smaller than the "20–30%" figure often quoted online. The gap has narrowed because the April 2025 rise in employer National Insurance (15% above a £5,000 threshold) and the 25% main rate of corporation tax have eroded much of the limited-company benefit. Enter your own day rate, days and expenses in the calculator above for an exact comparison, and use our Dividend Tax Calculator to fine-tune your salary/dividend split.
2026/27 Rates and Thresholds Used
| Item | 2026/27 figure |
|---|---|
| Personal allowance (tapered above £100k) | £12,570 |
| Basic-rate band up to | £50,270 |
| Higher-rate band up to | £125,140 |
| Corporation tax | 19% to £50k · 25% above £250k (marginal relief between) |
| Dividend allowance | £500 |
| Dividend tax rates | 8.75% · 33.75% · 39.35% |
| Employee NI | 8% (£12,570–£50,270) · 2% above |
| Employer NI | 15% above a £5,000 secondary threshold |
What HMRC Looks At
- Substitution: can you send someone else to do the work?
- Control: who decides how, when and where the work is done?
- Mutuality of obligation: is the client obliged to give you work, and are you obliged to accept?
- Financial risk: do you bear costs and risk if the project fails?
- Equipment: are you using your own kit?
- Integration: are you treated like staff (company emails, team meetings, line manager)?
Off-Payroll Working Rules (April 2021 onwards)
For medium and large private-sector clients (turnover > £10.2M, balance sheet > £5.1M, or 50+ employees), the end client must determine your IR35 status and issue a Status Determination Statement (SDS). For small private clients, the contractor's limited company still decides.
How to Legitimately Stay Outside IR35
Status is decided on your actual working practices, not just the wording of the contract. The strongest pointers towards genuine self-employment are:
- A genuine right of substitution — you can send a qualified replacement, and the client cannot veto them unreasonably.
- No mutuality of obligation — the client is not required to offer work, and you are not required to accept it.
- Control over how you work — you decide the methods, hours and (where possible) location, delivering an outcome rather than your time.
- Being in business on your own account — your own equipment, insurance, multiple clients, a website and the ability to make a loss.
If a contract is borderline, an independent IR35 contract review is far cheaper than getting it wrong. Keep a copy of any Status Determination Statement and the evidence behind your day-to-day working arrangements.
Umbrella vs Limited Company vs Sole Trader
Which structure suits you depends mainly on your IR35 status and how much admin you want:
- Umbrella (PAYE): simplest, and the usual choice for inside-IR35 work — you are employed by the umbrella and taxed like any employee.
- Limited company: the tax-efficient route for outside-IR35 contracts. Pair this calculator with our Dividend Tax Calculator to optimise your salary/dividend split, and the Capital Gains Tax Calculator if you later close the company and claim Business Asset Disposal Relief.
- Sole trader: a simpler self-employed route with no company, but it does not work for most agency/client contracts. See our Self-Employed Tax Calculator for Income Tax and Class 4 NI as a sole trader.
To sanity-check an inside-IR35 figure against a normal salaried role, convert your day rate with the Hourly-to-Salary Converter or compare PAYE take-home in the Salary After Tax Calculator.
Frequently Asked Questions
What is IR35? IR35 (officially the off-payroll working rules) is a UK tax rule that determines whether a contractor working through a limited company is genuinely self-employed (outside IR35) or effectively an employee in disguise (inside IR35). Outside IR35 contractors take dividends and pay less tax. Inside IR35 contractors are taxed broadly like employees, with no tax benefit from operating through a company.
How much more do you take home outside IR35 than inside? Less than the 20–30% often quoted online. On a £500/day contract over 220 working days (£110,000 gross), our 2026/27 calculator shows roughly £70,600 take-home outside IR35 versus £64,600 inside — a difference of about £6,000, or 9%. The advantage has narrowed since April 2025 because employer National Insurance rose to 15% (above a £5,000 secondary threshold) and the main rate of corporation tax is 25%. Your exact gap depends on day rate, days worked, expenses, salary level and pension contributions.
Who decides if a contract is inside or outside IR35? For public sector contracts and medium/large private sector clients, the end client makes the IR35 determination via a Status Determination Statement (SDS) under the off-payroll rules introduced April 2021. For small private clients (turnover under £10.2M), the contractor's limited company still decides.
What's the difference between umbrella and limited company? Umbrella companies employ the contractor and pay PAYE on the full income — used mostly for inside-IR35 contracts. Limited companies are owned by the contractor and pay salary + dividends — only worth it for outside-IR35 work. Inside IR35 + limited company has minimal tax benefit and is rarely used.
How accurate is this calculator? It gives a realistic comparison using 2026/27 tax rates and typical assumptions (£9,100 director salary outside IR35, £500 dividend allowance, 25% corporation tax above £50K, £100 monthly expenses). Your real take-home depends on expenses, pension contributions, marriage allowance and other personal factors — speak to a specialist contractor accountant.
What happens if HMRC decides I was inside IR35 when I worked outside? For medium and large clients the liability for an incorrect determination usually sits with the fee-payer (the client or agency), not you. For small private-sector clients your own limited company is liable and could owe the back income tax and National Insurance, plus interest and penalties, on the difference. HMRC can normally investigate four to six years (longer for deliberate errors), so keep contracts and evidence of your working practices.
Can I challenge an inside-IR35 status determination? Yes. If a client issues a Status Determination Statement you disagree with, you can use the client-led disagreement process — the client must respond with reasons within 45 days. You can also commission an independent IR35 contract review. HMRC's CEST tool can indicate status but is not binding and is widely criticised, so independent advice is wise for borderline cases.
How much does a contractor accountant or umbrella company cost? Specialist contractor accountants typically charge £100–£150 + VAT per month for a limited company. Umbrella companies take a margin of around £15–£30 per week (their fee, not extra tax). Be wary of umbrellas advertising 85–90%+ take-home — these are often non-compliant tax-avoidance schemes HMRC actively pursues.
Did IR35 change for 2026/27? The off-payroll framework from April 2021 remains in place — end clients still make the determination for medium and large businesses. The main recent changes are the rise in employer National Insurance to 15% (above a £5,000 threshold) from April 2025 and the 25% corporation tax rate, both of which narrow the inside-vs-outside gap. A 2023 plan to repeal the rules was scrapped before taking effect.
Last reviewed: June 2026. Calculations use the 2026/27 UK tax year, with rates published by HMRC / gov.uk. These figures are estimates — confirm your position with HMRC or a qualified accountant before acting.
Related Calculators
- Dividend Tax Calculator (UK) — 2026/27 dividend tax with the £500 allowance and full band breakdown.
- Self-Employed Tax (UK) — Income tax, Class 4 NI and Self Assessment for sole traders and freelancers.
- Capital Gains Tax Calculator — CGT on shares and assets, useful when closing a limited company.
- Salary After Tax — Compare an inside-IR35 figure against a permanent PAYE salary.
- Income Tax Calculator — Headline UK Income Tax across all bands for any income.
- Paycheck Calculator — UK PAYE and US federal take-home pay with NI / FICA, pension or 401k.