IR35 (off-payroll working) rules determine whether HMRC treats a contractor as a disguised employee. Outside IR35 means you operate through your own limited company (PSC), taking a salary below the NI threshold and the rest as dividends after Corporation Tax — typically the most tax-efficient structure. Inside IR35 means the engagement is treated as employment: your client (or its fee-payer) deducts Income Tax and NI from your invoice as if you were an employee. Enter your day rate to see the difference.
- Outside IR35 is almost always materially better for take-home — often 15–25% more.
- Inside IR35: your client deducts PAYE (Income Tax + employee NI 8%/2%); employer NI (15%) is also borne by the PSC, reducing the gross paid in.
- Outside IR35: take a salary at the Personal Allowance (£12,570); pay Corporation Tax (19–25%) on profit; distribute the rest as dividends (taxed at 10.75%/35.75%).
- Since April 2021 (private sector) / April 2017 (public sector), it is the client that determines IR35 status via a Status Determination Statement (SDS), not the contractor.
- Challenging an incorrect SDS is possible — keep evidence of business-like behaviour (substitution, financial risk, control).
- The calculator uses a simplified model. Real-world figures differ based on pension, expenses, business costs and other income.
How is inside IR35 take-home calculated?
When inside IR35, the fee-payer deducts Income Tax and employee Class 1 NI from your deemed salary (roughly the invoice value). On top of this, employer NI (15% on salary above the £5,000 secondary threshold) reduces what your PSC receives. In practice the contractor bears both sides of NI — something an employee would not pay.
| Item (illustrative — £500/day × 220 days = £110,000 contract) | Inside IR35 | Outside IR35 |
|---|---|---|
| Contract value | £110,000 | £110,000 |
| Employer NI (on salary above £5,000) | ~£12,827 | ~£1,136 (on £12,570 salary) |
| Net salary / Income Tax / Employee NI | varies | Salary £12,570, 0 IT, 0 NI |
| Corporation Tax | — | ~£18,390 |
| Dividend tax | — | ~£12,975 |
| Approximate take-home | ~£64,000 | ~£77,000 |
Illustrative only — use the calculator above for your exact figures.
How is IR35 status determined?
HMRC looks at the working arrangements, not the contract wording. The key tests are: substitution (can you send someone else?), control (does the client control how/when/where you work?), and mutuality of obligation (must the client offer work; must you accept?). Pass all three and you are likely outside IR35. HMRC's CEST tool gives a determination, but it is not binding and courts have disagreed with its outputs in some cases.
Frequently asked questions
Who decides my IR35 status now?
For private-sector engagements (since April 2021) and public-sector engagements (since April 2017), the client (end hirer) makes the determination via a Status Determination Statement. Small private-sector clients are exempt — in that case the contractor decides. A "small company" means meeting two of: turnover ≤ £10.2m, balance sheet ≤ £5.1m, employees ≤ 50.
Can I operate inside IR35 through my own limited company?
Yes, but you lose most of the tax benefit. Your PSC invoices the client, the fee-payer deducts PAYE, and the net arrives in your company. You still need to run the company and bear its costs, but you cannot extract the profit tax-efficiently. Many contractors in this position close their PSC and work via an umbrella company instead.
What is an umbrella company?
An umbrella company acts as your employer when you are inside IR35. You become an employee of the umbrella; it invoices the client, deducts PAYE and NI, and pays you a net salary. The umbrella charges a margin (typically £20–£40/week). Compliant umbrellas are registered with HMRC and show you a full key information document before you sign.