IR35 explained

Updated 7 November 2026

If a contract is inside IR35, you are paid like an employee. If it is outside, your company keeps the money and you decide how to draw it. At £500 a day for 220 days the gap is about £3,400 a year in favour of outside, which is less than most people assume.

The test is one question. If your limited company did not exist, would you be the client’s employee? Yes means inside. No means outside, and your company is treated as a business selling a service. Status belongs to the contract, not to you, so the same contractor can be outside with one client and inside with the next.

Outside IR35

The company invoices and the money is the company’s. Most contractors take a salary of £12,570, the personal allowance, so no income tax or employee National Insurance is due on it. The rest comes out as dividends after corporation tax.

Genuine business costs come off before tax: equipment, software, an accountant, pension contributions. That and the absence of National Insurance on dividends are where the outside advantage comes from.

Inside IR35

Whoever pays your company’s fee has to put it through payroll. Income tax and employee National Insurance come off under PAYE, as they would for permanent staff.

Employer National Insurance is due too, at 15% above £5,000, and this is the part that catches people. The client does not pay it. It comes off the assignment rate before your gross pay is worked out, along with the apprenticeship levy of 0.5% if the umbrella’s pay bill is over £3 million. A good umbrella shows both lines on your payslip reconciliation.

You are taxed as an employee without becoming one, so there is no holiday, notice or redundancy pay from the client. Most inside contracts run through an umbrella company, which becomes your legal employer and charges a margin, usually quoted per week. Being paid inside through your own company as a deemed payment is still possible, but rare.

Who decides

Medium and large clients decide. With a small client, the decision stays with you. HMRC’s CEST tool gives an indicative answer and is worth running, but if HMRC ever looks, the contract wording and what actually happens day to day are what count.

The numbers at £500 a day

Outside, £110,000 goes through a limited company with a £12,570 salary and £2,000 of expenses. After corporation tax and dividend tax you keep about £68,988.

Inside, at the same £500 assignment rate, a £25 weekly umbrella margin, 15% employer National Insurance and the 0.5% levy come off first. Gross pay is about £94,935. After PAYE and employee NI you keep about £65,620.

That is a gap of about £3,400. It is narrower than it used to be because dividend tax rose in April 2026, and corporation tax above £50,000 of profit already runs at 25% less marginal relief.

Expenses claimed outside widen the gap. An uplifted inside rate narrows it: agencies often add 10% to 20% to an inside rate to cover the employer costs, so ask for one.

Expenses and pension inside

You cannot claim travel and subsistence for the assignment, and umbrella expense schemes are tightly restricted. Pension is what remains. Salary sacrifice contributions come off before employer NI and PAYE, which makes them the one way an inside contractor can still shelter a large slice of the rate.

Outside, nothing changes: the company pays allowable costs and pension contributions before corporation tax.

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