Inside vs Outside IR35: Your Take-Home

What IR35 actually is

IR35 - the "off-payroll working" rules - exists to stop people working like employees while billing through a company to pay less tax. If HMRC decides you would have been an employee had the client engaged you directly, your contract is inside IR35 and the income is taxed like employment. If you are genuinely in business on your own account, you are outside IR35.

Status turns on the real working relationship - whether the client controls how you work, whether you must do the work personally or can send a substitute, and whether there is an ongoing obligation to offer and accept work - not simply on what the contract says.

Outside IR35: salary plus dividends

Outside IR35, the tax-efficient setup through your own limited company is a small director's salary plus dividends:

• A salary of around £12,570 sits at both the Personal Allowance and the National Insurance threshold, so it carries no Income Tax and no employee NI.
• The company pays Corporation Tax on its profit - 19% up to £50,000, 25% above £250,000, and a tapered rate in between via Marginal Relief.
• You draw the post-tax profit as dividends, taxed at 10.75% / 35.75% / 39.35% for 2026/27 after a £500 dividend allowance. Dividends carry no National Insurance, which is where most of the saving comes from.

Note: dividend tax rates rose on 6 April 2026 (basic to 10.75%, higher to 35.75%), so outside-IR35 take-home is slightly lower this tax year than in 2025/26 - the figures here already reflect the new rates.

Inside IR35: taxed like employment

Inside IR35, the engagement is treated as employment. Income Tax and employee National Insurance come off through PAYE, and the salary-plus-dividends structure is off the table. Just as importantly, the assignment (day) rate has to cover employer National Insurance before it becomes your gross pay - and if you work through an umbrella company, an umbrella margin and the Apprenticeship Levy come out too. All of this is why inside-IR35 take-home is materially lower for the same headline rate.

So how big is the gap?

The exact difference depends on your day rate, but outside IR35 typically leaves you with a higher share of your contract value. Many contractors look for a 15-25% higher day rate on inside-IR35 work to end up in a comparable position. Rather than rely on a rule of thumb, put your real day rate through the UK take-home calculator and compare inside vs outside side by side - it uses the 2026/27 figures above, including Scotland's separate income tax bands.

Invoicing either way

Outside IR35, you invoice the client from your limited company (adding VAT if you are VAT-registered). The UK invoice generator creates a clean VAT invoice in pounds. Inside IR35, payment usually runs through an agency or umbrella via PAYE, so you may not raise a normal sales invoice at all.

The bottom line

Inside vs outside IR35 is not about avoiding tax - it is about which set of rules applies to how you genuinely work. Get the status right, model the take-home on both bases, and price your day rate accordingly. This guide is educational and not tax advice; for a status determination or your own numbers, speak to a qualified accountant.