Inside vs Outside IR35: Side-by-Side Take-home
For UK contractors, IR35 status is the single biggest determinant of take-home. Outside IR35 the engagement is treated as genuine self-employment through a Personal Service Company (Ltd), allowing a tax-efficient salary plus dividend mix. Inside IR35 the contract is taxed as deemed employment, usually through an umbrella, with full PAYE and NI on the day rate.
Take-home across day rates (2026/27)
All figures assume 220 working days a year, England rest-of-UK bands, and the standard tax-efficient Ltd structure (£12,570 director salary + remaining profit as dividends) for the outside-IR35 column. Computed by the same engine as the contractor calculator.
| Day rate | Annual turnover (220d) | Outside IR35 | Inside IR35 | Difference |
|---|---|---|---|---|
| £350/day | £77,000 | £56,022 | £55,217 | £804 |
| £400/day | £88,000 | £61,378 | £61,597 | -£220 |
| £500/day | £110,000 | £72,090 | £72,357 | -£267 |
| £600/day | £132,000 | £82,291 | £81,746 | £544 |
| £700/day | £154,000 | £90,982 | £93,406 | -£2,424 |
| £800/day | £176,000 | £100,481 | £105,066 | -£4,585 |
Why the gap narrows at lower rates
Outside IR35's main advantage is using the £12,570 director salary to absorb the Personal Allowance with no Income Tax, then taking the rest as dividends at preferential rates (8.75% basic, 33.75% higher, 39.35% additional). The salary itself attracts only employer NI (15.05% above £5,000) so the cost of "using" the Personal Allowance is small.
Inside IR35 the whole day rate is taxed as employment income at the standard PAYE rates (20%/40%/45%) plus full employee NI (8% band, 2% above). The 2024 NI cuts narrowed the gap by lowering the inside-IR35 effective rate, but the dividend rate advantage still favours outside IR35 - especially at higher day rates where a larger share of profit can be paid out at the 8.75% basic dividend rate after Corporation Tax.
When inside IR35 is actually preferable
- Short engagements (less than 6 months) where the cost of incorporating, registering for VAT, running payroll, and filing accounts exceeds the IR35 differential.
- Genuinely employee-like contracts where pretending to be outside IR35 carries real HMRC investigation risk. The penalty for a failed status determination is full PAYE + NI plus interest on the whole engagement value.
- Risk-averse contractors near retirement who would rather have employment protections (sick pay, redundancy, parental leave) than the tax saving.
Frequently asked questions
- What is the take-home difference between inside and outside IR35?
- On a typical contractor day rate, outside-IR35 take-home through a Limited company beats inside-IR35 (umbrella or deemed-employee) by roughly £5,000-£25,000 a year depending on the rate. The gap has narrowed materially since the 2024 NI cuts and Corporation Tax reform, but Ltd company structure remains more tax-efficient for genuinely independent engagements.
- Who decides IR35 status?
- Under the off-payroll working rules effective from April 2021, the end client decides the IR35 status when the client is medium or large. The client must issue a Status Determination Statement (SDS). For small clients (under the Companies Act 2006 thresholds) the contractor's own Personal Service Company decides. HMRC's CEST tool is the most common assessment but is not binding on tribunals.
- Does inside IR35 mean I have to use an umbrella?
- Not necessarily - the client can pay through a "deemed employment" mechanism direct to the contractor or via the agency, deducting PAYE and NI as if employed. In practice most inside-IR35 contracts route through an umbrella company because the umbrella handles the PAYE administration and provides employment protections (holiday pay, sick pay, pension auto-enrolment).
- What is the Corporation Tax marginal rate effect?
- From April 2023 onwards the small profits rate is 19% on profits up to £50,000 and the main rate is 25% above £250,000, with a marginal relief band in between that produces an effective 26.5% marginal rate on profits £50,000-£250,000. Most contractors operate in the marginal band, so the effective CT bite on Ltd profits is the 26.5% figure rather than the headline 25%.
- Is outside IR35 still worth the hassle?
- Less so than pre-2024 but still yes for most contracts. Inside-IR35 umbrella vs outside-IR35 Ltd has narrowed because employee NI cut from 12% to 8%, Class 4 NI from 9% to 6%, and Corporation Tax up to 26.5% marginal. At £400-500/day the gap is around £5-8k; at £700+/day it widens back out to £15-25k+ depending on dividend levels.