UK Contractor Calculator 2026/27: IR35

How UK contractor take-home works in 2026/27

Your status under the IR35 (off-payroll working) rules determines which tax regime applies + your effective take-home. Three distinct scenarios:

Inside IR35 (Chapter 10 ITEPA 2003)

You're treated as a PAYE employee of the end client (large company) or umbrella company (where the client is small + status determination remains with you). Your full day-rate income passes through PAYE - Income Tax, Employee Class 1 NI, often Employer NI deducted from the rate, Apprenticeship Levy where applicable.

Net result resembles a normal salary at the equivalent annual gross. Day-rate must be uplifted by ~12-15% to compensate for Employer NI (15%) that umbrella companies deduct from the gross. Effective "Inside IR35 day rate" should be ~110-115% of equivalent permanent salary day rate.

Outside IR35 (Chapter 8 ITEPA 2003) - genuinely self-employed via Ltd Co

You operate through a Personal Service Company (PSC). The optimal 2026/27 extraction structure:

1. Director salary £12,570 - uses full Personal Allowance, no IT, £125-£185 NI annually (depending on Employer NI exposure)
2. Corporation Tax on remaining profits:
   • 19% on first £50,000 of profit (small profits rate)
   • 25% on profits above £250,000 (main rate)
   • Marginal relief in £50k-£250k band: effective ~26.5% marginal rate
3. Take post-CT profits as dividends:
   • First £500 tax-free (dividend allowance)
   • Up to £37,200 dividends (basic-rate band remaining): 10.75% = £3,255
   • Above £50,270 to £125,140 (higher-rate): 35.75%
   • Above £125,140 (additional-rate): 39.35%

Sole trader self-employed

Same trade but no limited company. Profits taxed entirely as Income Tax + Class 4 NI in the year earned. Simpler admin (no CT, no dividends) but less tax-efficient at higher day rates - all profits hit IT marginal rate + Class 4 6%/2%.

Outside IR35 + Ltd Co - the optimal 2026/27 split

Worked example for £100,000 net profit (after legitimate business expenses):

vs Inside IR35 equivalent: ~£74,000 gross PAYE income (after Employer NI uplift) - PAYE net ~£52,800 + you typically need higher day rate to match.

vs Sole trader £100k profit: ~£68,800 net (after IT + Class 4 NI

• Class 2 voluntary).

Outside IR35 net is approximately equal to sole trader at £100k profit but the structure unlocks valuable pension optimisation (see below) + BADR exit relief.

The gap has narrowed post-2024

Three reforms reduced the outside-IR35 advantage:

1. Employee NI cut: from 12% → 8% (April 2024). Reduced inside-IR35 tax burden.
2. Class 4 NI cut: from 9% → 6%. Reduced sole-trader burden.
3. Corporation Tax restructured: from flat 19% to 19%-25% with marginal relief band. Increased Ltd Co burden for mid-profits.

At typical contractor day rates (£400-£600) and 220-day years, the take-home gap between outside-IR35 Ltd Co vs PAYE inside-IR35 is now £2,000-£5,000 per year - not the £10k+ it used to be 2017-2024.

At lower day rates (£200-£300), outside IR35 still wins clearly because the PA-using salary covers more proportional income.

At higher day rates (£700+) the gap widens AGAIN because additional-rate dividend tax (39.35%) hits + 25% CT on more profits + the 60% effective PA-taper band at £100-125k creates significant complications. Some high-rate contractors now consider umbrella over Ltd Co for simplicity.

The pension extraction advantage (Outside IR35 only)

The single biggest outside-IR35 advantage in 2026/27 is employer pension contribution from limited company:

• Deductible as business expense - reduces Corporation Tax
• No personal Income Tax on contribution
• No NI either direction
• Counts toward AA £60,000 + carry-forward £180k over 4 years

Worked: £40,000 employer pension contribution:

• CT saved: 25% × £40k = £10,000
• Personal tax avoided (vs dividend extraction): ~£10,000 (35.75% of post-CT)
• Effective cost: ~£25,000 for £40,000 in pension = 37.5% effective relief

Inside IR35 (PAYE) workers cannot access this - they're limited to employee pension contributions (max ~£60k AA) which use post-tax salary sacrifice. Still beneficial but less efficient than direct employer contribution.

Status determination - who decides?

Large client (over £10.2m turnover, 50+ employees): client determines your IR35 status via Status Determination Statement (SDS). Liability for incorrect determination sits with the client / agency / fee-payer.

Small client (under threshold): you determine status as the worker. Same rules apply but you bear liability for incorrect status.

HMRC CEST tool: official Check Employment Status for Tax tool. Free, online, generates indicative status determination. Many advisers consider CEST flawed - over-classifies as inside IR35. Specialist IR35 contracts (Qdos, IPSE) provide arguably better assessments.

Determinative tests (HMRC + case law):

1. Mutuality of Obligation (MOO): client must offer work, you must accept - employee-like
2. Personal service: must do work yourself (no substitution) - employee-like
3. Control: client controls how/when/where work done - employee-like
4. Right of substitution: can send substitute - self-employed-like
5. In-business factors: business risk, own equipment, marketing yourself - self-employed-like

Common mistakes + audits

1. "Friday-to-Monday" - same role, same client, switched to Ltd Co the following Monday - HMRC treats as same employment relationship, IR35 inside. High audit risk.
2. No legitimate substitution clause - or never exercised - is one of the strongest inside-IR35 indicators.
3. Treated like employee (company email, team meetings, year-end reviews) - inside IR35 even if Ltd Co.
4. Mixing personal and business expenses through Ltd Co - HMRC investigations frequently uncover this; benefit-in-kind charges apply.
5. Director's loan account spiralling - watch Section 455 trap (32.5% CT on overdrawn DLA above £10k).

VAT considerations

Flat Rate Scheme (FRS): simpler VAT but only profitable at lower expense levels. Limited Cost Trader (LCT) 16.5% rate post-2017 made FRS unattractive for most service-based contractors.

Standard VAT: 20% on services, reclaim input VAT on business purchases. Most contractors above £90k turnover threshold.

Voluntary registration below threshold: useful if your clients are VAT-registered (they reclaim) and you have meaningful input VAT to reclaim. Adds compliance burden.

When to switch from PSC to umbrella (Inside IR35 reality)

If your contracts are CONSISTENTLY inside IR35 (post-status reform 2021), consider closing the PSC and going umbrella:

• Save admin cost: £1,500-£3,000/yr accounting fees eliminated
• Avoid CT compliance: no CT returns, no Companies House filings
• Simpler tax: PAYE only via umbrella
• Pension flexibility: still possible via salary sacrifice within umbrella (worse than direct employer contribution but still useful)
• Lose BADR for company wind-up if you close PSC

For genuinely OUTSIDE IR35 work, PSC remains best.

Closing the PSC at career end - BADR

Business Asset Disposal Relief (BADR) 18% rate (from April 2026, up from 14% in 2025/26 and 10% before) on first £1m lifetime gains.

For PSC contractor with retained earnings + closing the company, MVL (Members' Voluntary Liquidation) distributes profits as capital distribution taxed at BADR rate vs dividend rate:

• £200k MVL distribution: BADR 18% = £36,000
• Same as dividend at higher-rate 35.75% = £67,500
• BADR saves £31,500

See LTD company MVL closure guide for the full mechanics + 60-day TAAR phoenix anti-avoidance rule.

Related calculators and guides

• IR35 Explained - status tests + history
• Inside IR35 meaning guide - what "inside" means in practice
• Sole Trader vs Limited Company 2026/27 - alternative to PSC
• Optimum director salary 2026/27 - optimal salary level for outside-IR35
• Dividend tax calculator - dividend extraction tax
• Pension contribution calculator - employer pension via PSC
• LTD company MVL closure 2026/27 - closing PSC with BADR
• Director pension strategies - SSAS + employer pension routes
• Director loan account - DLA + S455 trap to avoid
• BADR guide - 18% exit relief mechanics
• VAT registration guide - £90k threshold
• VAT Flat Rate Scheme - FRS reality post-LCT
• Class 2 + Class 4 NI 2026/27 - sole trader comparison
• PAYE + RTI new employer guide - if hiring through PSC

Sources

Statutory basis: Income Tax (Earnings and Pensions) Act 2003 Chapter 8 (intermediaries / IR35) + Chapter 10 (off-payroll working), Finance Act 2020 Schedule 1 (off-payroll reform extension to private sector April 2021), Corporation Tax Act 2010 (CT rates + marginal relief), Companies Act 2006 (Ltd Co compliance). 2026/27 figures verified against gov.uk + HMRC Employment Status Manual.