IR35 Inside vs Outside: How Much Does It Affect Take-Home Pay? UK 2026

IR35 -- officially the off-payroll working rules -- determines whether a contractor is taxed as an employee or as a business. The determination matters enormously. Inside IR35 can reduce your take-home pay by GBP 15,000 to GBP 25,000 per year compared with an outside contract at the same day rate. Here is how the numbers stack up for 2026/27.

Inside IR35: How It Works

When a contract is determined to fall inside IR35, HMRC treats you as a deemed employee of your client. Your personal service company (PSC) or the end client (for medium/large businesses) must operate PAYE and deduct income tax and employee National Insurance from your payments.

You receive a "deemed payment" and cannot extract remaining profits as dividends at the lower dividend rates. Your PSC can still deduct employer NI before calculating the deemed payment, but there is no scope for salary/dividend splitting or expenses deductions beyond the 5% flat allowance (which was actually removed for public sector and off-payroll workers -- expenses claims are very limited inside IR35).

Employer NI at 15% (above the GBP 5,000 secondary threshold) is also due, typically from the fee paid to the PSC.

Outside IR35: How It Works

Outside IR35, your PSC operates as a genuine business. The typical contractor structure is:

• Pay yourself a low salary (often at or near the GBP 12,570 personal allowance or the NI threshold)
• Extract remaining profits as dividends

In 2026/27, the dividend allowance is GBP 500. Dividends above this are taxed at 10.75% (basic rate), 35.75% (higher rate), or 39.35% (additional rate) -- all lower than the equivalent income tax rates.

You can also claim legitimate business expenses (professional subscriptions, accountancy, equipment, home office costs) against corporation tax, reducing the profit extracted.

Corporation tax on profits up to GBP 50,000 is 19%; between GBP 50,000 and GBP 250,000, marginal relief applies up to 25%.

Worked Example at GBP 400/Day

Assume a 5-day week, 46 working weeks per year (allowing for holidays and breaks) = 230 days x GBP 400 = GBP 92,000 gross annual fees.

Inside IR35 (approximate net)

Employer NI at 15% is deducted from the gross fee paid to the PSC. Approximately GBP 10,400 of employer NI is due, leaving GBP 81,600 as the employment income base. Income tax and employee NI are then applied.

Income tax: GBP 12,570 personal allowance is tax-free; GBP 37,700 at 20% = GBP 7,540; GBP 31,330 above GBP 50,270 at 40% = GBP 12,532; total tax approx GBP 20,072. Employee NI: 8% on GBP 37,700 = GBP 3,016; 2% on GBP 31,330 = GBP 627; total NI approx GBP 3,643.

Net take-home: approximately GBP 57,885.

Outside IR35 (approximate net)

Gross fees to PSC: GBP 92,000. Salary of GBP 12,570 (tax/NI-free at this level using Employment Allowance). Legitimate expenses estimated at GBP 5,000. Accountancy GBP 2,000. Remaining taxable profit for corporation tax: approximately GBP 72,430. Corporation tax at 19%: approx GBP 13,761. Post-tax profit available for dividends: GBP 58,669.

Dividends: GBP 500 allowance free; remainder at 10.75% basic rate (assuming salary keeps you in basic rate band after dividend grossing up). Dividend tax approx GBP 5,500.

Net take-home (salary + dividends after all taxes): approximately GBP 73,000 to GBP 75,000 depending on expenses.

The difference at GBP 400/day: roughly GBP 15,000 to GBP 17,000 per year.

Worked Example at GBP 600/Day

GBP 600 x 230 days = GBP 138,000 gross.

Inside IR35: The gross fee attracts employer NI; the deemed employment income falls into the additional rate and higher rate bands. Tax and NI combined will absorb roughly 55-60% of the gross above the personal allowance. Net take-home: approximately GBP 72,000 to GBP 75,000.

Outside IR35: At this level your combined salary and dividends will push into higher and possibly additional rate bands. Even so, the corporation tax structure and lower dividend rates result in a net take-home of approximately GBP 90,000 to GBP 95,000.

The difference at GBP 600/day: approximately GBP 18,000 to GBP 22,000 per year.

Who Makes the IR35 Determination?

For contracts with medium and large businesses (defined under the Companies Act: turnover over GBP 10.2m, balance sheet over GBP 5.1m, more than 50 employees -- meeting two of three criteria), the end client is responsible for issuing a Status Determination Statement (SDS). For small clients, the PSC itself determines status.

HMRC's CEST (Check Employment Status for Tax) tool is not always definitive. Contractors should also consider the common law employment tests: substitution, control, and mutuality of obligation.

What If a Client Gets It Wrong?

From April 2021, medium and large clients bear the liability if they incorrectly determine a contract as outside IR35 and HMRC later disagrees. Clients have become cautious, often applying blanket inside-IR35 determinations. If you believe your determination is wrong, you have the right to appeal it through the client's formal disagreement process.

Use the CalcHub contractor take-home calculator to model inside vs outside IR35 scenarios at your day rate.