IR35 Inside vs Outside: Real Take-Home Difference on £500/Day (2025/26)

The starting point: £500/day, 220 days

We'll use a standard contractor assumption:

• Day rate: £500.
• Working days: 220 (roughly 44 weeks × 5 days, accounting for holidays and gaps).
• Annual revenue into limited company (outside IR35): £110,000.
• Inside IR35: the end client or agency processes this as "deemed salary" through the umbrella.

Outside IR35 — limited company route

When working outside IR35, your limited company receives the gross contract income. The optimal tax structure for 2025/26:

Step 1: Pay yourself a small salary

• Salary: £12,570 (up to Personal Allowance — no Income Tax).
• Employer NI on salary above £5,000: (£12,570 − £5,000) × 15% = £1,136.
• Employee NI on salary above £12,570: £0 (at £12,570 exactly).

Step 2: Extract remaining profit as dividends

• Company revenue: £110,000.
• Less salary: £12,570.
• Less employer NI: £1,136.
• Less business expenses (estimated £4,000 — insurance, accountant, software): £4,000.
• Gross profit before CT: £92,294.
• Corporation Tax at 25% (profits over £50,000): £23,074 (note: profits between £50k–£250k use marginal relief; this uses simplified 25% for illustration).
• Available for dividends: £69,220.

Step 3: Tax on dividends

• Dividend allowance (2025/26): £500 tax-free.
• Dividends above £500 within basic-rate band: taxed at 8.75%.
• Dividends above basic-rate band (£50,270): 33.75%.
• Personal Allowance already used by salary.
• Dividends taxable: £69,220 − £500 = £68,720.
  • £37,200 at 8.75% = £3,255.
  • £31,520 at 33.75% = £10,638.
  • Total dividend tax: £13,893.

Outside IR35 take-home (approximate):

• Salary net: £12,570 − £0 tax − £0 NI = £12,570.
• Dividends received: £69,220.
• Dividend tax: £13,893.
• Net from dividends: £55,327.
• Total take-home: £67,897 (~£5,658/month).

With better expense claiming and more aggressive pension contributions, some outside IR35 contractors achieve £70,000–£75,000. This example uses conservative estimates.

Inside IR35 — umbrella company route

Inside IR35, the umbrella company processes you as an employee. The day rate is paid to the umbrella, which deducts employer NI, pension and its fee, then processes the remaining "salary" through PAYE.

Revenue into umbrella: £110,000.

Umbrella deductions:

• Employer NI: (£110,000 − £5,000) × 15% = £15,750.
• Employer pension (typically 3% minimum): £110,000 × 3% = £3,300.
• Umbrella fee (typically £20–£30/week): ~£1,200/year.
• Gross deemed salary for PAYE: £110,000 − £15,750 − £3,300 − £1,200 = £89,750.

PAYE deductions on £89,750 deemed salary:

• Personal Allowance: £12,570.
• Taxable income: £77,180.
• Income Tax (20% × £37,700): £7,540.
• Income Tax (40% × £39,480): £15,792.
• Total Income Tax: £23,332.
• Employee NI (8% × £37,700): £3,016.
• Employee NI (2% × £39,480): £790.
• Total NI: £3,806.
• Employee pension: included in the 3% above (from deemed salary).

Inside IR35 take-home:

• Deemed salary: £89,750.
• Less income tax: £23,332.
• Less employee NI: £3,806.
• Net PAYE: £62,612.
• Employee pension portion (not accessible until pension age): −£2,693.
• Liquid take-home: ~£59,919 (~£4,993/month).

Side-by-side comparison

Note: outside IR35 benefits further if expenses are larger or more pension contributions are used.

What rate do you need inside IR35 to match outside?

If you want to replicate an outside IR35 take-home of ~£68,000 working inside IR35:

• Reverse engineering: need PAYE net of ~£68,000.
• Working backwards through umbrella deductions: the gross contract value needed is approximately £130,000–£135,000.
• Day rate needed: £130,000 ÷ 220 = ~£590–£615/day.

Rule of thumb: add approximately 15–25% to your outside IR35 rate to find the inside IR35 equivalent.

The impact of pension contributions

Both routes benefit from pension:

Outside IR35: employer (company) pension contributions are a deductible company expense. Contributing £15,000 to a pension:

• Reduces CT bill by £15,000 × 25% = £3,750.
• Goes into pension pot.
• Net cost: £11,250 of take-home "foregone" to build £15,000 pension.

Inside IR35: SIPP contributions made via the umbrella's salary sacrifice scheme (not all umbrellas offer this), or via personal SIPP (self-relief). At the 40% rate, £10,000 pension contribution saves £4,000 in IT + £200 NI via personal contribution or more via salary sacrifice.

IR35 risk and the reform context

Since April 2021, responsibility for determining IR35 status has moved to the end client (for medium/large organisations) rather than the contractor. The key tests remain:

1. Substitution: Can you send someone else to do the work?
2. Control: Does the client control how (not just what) you work?
3. Mutuality of Obligation: Is the client obliged to offer work and you obliged to accept it?

HMRC's CEST (Check Employment Status for Tax) tool gives a determination, but CEST is widely criticised for being unclear. An independent IR35 specialist review (typically £500–£1,500) is worth commissioning for high-value contracts.

For a full explanation of the three tests, see our IR35 explained guide.

Sources

• HMRC: IR35 — off-payroll working rules
• HMRC: Check Employment Status for Tax (CEST)
• HMRC: Corporation Tax rates