Day Rate Contractor Take-Home: Inside vs Outside IR35 at GBP400, GBP600 and GBP800 Per Day

IR35: The Framework

IR35 legislation (technically the "off-payroll working rules" since the 2017 and 2021 reforms) determines whether a contractor working through a personal service company (PSC) should be taxed like an employee. The rules apply when:

• The contractor provides services to a client
• The contractor works through an intermediary (usually their own limited company)
• The working arrangements are such that, if the contractor worked directly for the client, they would be considered an employee

If IR35 applies, the income from the engagement is treated as "deemed employment income." If it does not apply, the contractor can extract income from their PSC in the most tax-efficient way -- typically a combination of salary and dividends.

Assumptions for the Calculations

All calculations below assume:

• 230 working days per year (after accounting for holidays, bank holidays and bench time)
• Outside IR35: PSC takes minimum salary of GBP12,570 (at Personal Allowance level) and the remainder as dividends
• Outside IR35: Corporation tax paid at 19% on profits up to GBP50,000; 25% above GBP250,000; marginal relief between
• 2026/27 dividend allowance: GBP500 (tax-free)
• Dividend tax rates: 8.75% basic rate, 33.75% higher rate, 39.35% additional rate
• Inside IR35: Employee income tax and NI applied, plus employer NI at 13.8% (deducted from contract income by fee-payer before contractor receives it)
• Allowable expenses outside IR35: estimated GBP5,000 for a typical contractor (accountancy, professional subscriptions, limited home office)

GBP400/Day Rate (c. GBP92,000 Annual Contract Value)

Annual gross contract income: 230 days x GBP400 = GBP92,000

Outside IR35

Income tax on salary (GBP12,570 = Personal Allowance, so GBP0 income tax) NI on salary: employer NI at 13.8% above GBP5,000 = GBP1,041 (company cost); employee NI: GBP0 if salary set at exactly GBP12,570 (just at primary threshold)

Dividends taken: GBP60,288 Tax-free allowance: GBP500 Taxable dividends: GBP59,788

Income tax position (total income including salary: GBP72,858):

• Personal Allowance used on salary (GBP12,570)
• Remaining basic rate band: GBP50,270 - GBP12,570 = GBP37,700 of dividends at 8.75% = GBP3,299
• Higher rate dividends: GBP59,788 - GBP500 - GBP37,700 = GBP21,588 at 33.75% = GBP7,286

Total personal tax: GBP3,299 + GBP7,286 = GBP10,585

Take-home (outside IR35): GBP12,570 (salary) + GBP60,288 (dividends) - GBP10,585 (dividend tax) = approximately GBP62,273

Inside IR35

Under inside IR35, the fee-payer (client or agency) deducts employer NI before paying the contractor's PSC:

Take-home (inside IR35): approximately GBP56,568

Difference at GBP400/day: approximately GBP5,700 per year in favour of outside IR35.

GBP600/Day Rate (c. GBP138,000 Annual Contract Value)

Annual gross contract income: 230 days x GBP600 = GBP138,000

Outside IR35

Note: profits between GBP50,000 and GBP250,000 attract marginal relief. At GBP120,430 the effective CT rate is approximately 22.75%.

Total income for personal tax purposes: GBP12,570 (salary) + GBP93,030 (dividends) = GBP105,600

Personal Allowance taper: income above GBP100,000 reduces PA by GBP1 for every GBP2. At GBP105,600 adjusted net income, Personal Allowance is GBP12,570 - GBP2,800 = GBP9,770. This significantly complicates the position.

Effective personal tax on dividends (approximately): GBP28,000-GBP32,000

Estimated take-home (outside IR35): approximately GBP73,000-GBP78,000

To preserve the full Personal Allowance, the contractor would need to make pension contributions through the PSC to bring personal taxable income below GBP100,000. This is a very common strategy for contractors at this rate.

Inside IR35

Estimated take-home (inside IR35): approximately GBP77,954

Wait -- at this rate, inside IR35 and outside IR35 produce similar take-home results? This is partly because the Personal Allowance taper hits outside IR35 contractors hard at around GBP100,000 of personal income. A contractor who uses pension contributions to bring personal income below GBP100,000 (while letting the pension fund the retirement benefit) would significantly outperform the inside IR35 position.

Difference at GBP600/day: approximately GBP5,000-GBP15,000 in favour of outside IR35, depending heavily on pension strategy.

GBP800/Day Rate (c. GBP184,000 Annual Contract Value)

Annual gross contract income: 230 days x GBP800 = GBP184,000

Outside IR35

At this income level, the contractor will have completely lost their Personal Allowance (eliminated at GBP125,140 adjusted net income). All income is taxed from the first pound.

Personal tax on GBP126,487 of dividends (entirely at 33.75% higher rate + some at 39.35% additional rate where total income exceeds GBP125,140): approximately GBP40,000-GBP45,000.

Estimated take-home (outside IR35): approximately GBP93,000-GBP98,000

Aggressive pension contributions into the PSC (director's pension, employer contributions) can materially improve this. An annual pension contribution of GBP30,000 via the PSC reduces corporation tax while building retirement wealth.

Inside IR35

Estimated take-home (inside IR35): approximately GBP99,271

Interestingly, at GBP800/day the gap between inside and outside IR35 without pension planning narrows because the corporation tax rate on profits in this range is high (marginal relief approaching 25%). The real advantage for outside IR35 contractors at high rates comes from:

1. Employer pension contributions -- the PSC can pay up to GBP60,000 per year into a director's pension as a business expense, reducing corporation tax
2. Timing flexibility -- profits can be retained in the company across years, smoothing the tax rate
3. Spouse/partner dividends -- if a spouse or partner holds shares in the PSC, the dividend allowance and their personal tax position can be utilised

Difference at GBP800/day (without pension planning): approximately GBP3,000-GBP7,000 in favour of inside IR35 in pure take-home terms. With pension planning: GBP10,000-GBP25,000 in favour of outside IR35.

Summary Table

*With pension contribution strategy, take-home can increase significantly.

The Contractor Cost to Client

Many contractors negotiate day rates based on a comparison with PAYE employment. Clients should be aware that inside IR35 contractors are more expensive than they appear:

A GBP600/day inside IR35 contract costs the client:

• GBP138,000 in fees
• The employer NI (GBP18,492) is already borne by the contractor, not added on top
• But the client effectively funds it through the fee rate

Outside IR35 at GBP550/day may produce a better result for both parties if the contractor can take home more efficiently and the client pays a lower gross rate.

Key Planning Points

For outside IR35 contractors:

• Use employer pension contributions through your PSC to reduce corporation tax and personal income below GBP100,000
• Ensure your accountant files corporation tax and dividend paperwork correctly
• Review your IR35 status on each new engagement -- a contract change can shift status
• Consider whether your spouse or civil partner could hold shares in the PSC

For inside IR35 contractors:

• Ensure the fee-payer is applying the correct PAYE treatment
• Check whether you are receiving a separate contract income statement (the "deemed salary" calculation)
• Negotiate the rate to reflect the additional employer NI cost -- you should not be bearing this if your rate was originally negotiated on an outside IR35 basis

These calculations are estimates based on simplified assumptions. Every contractor's position is different. A qualified accountant specialising in contractor tax can produce precise figures for your specific situation.