What does Inside IR35 mean?

Inside IR35 means that you are considered an employee of your client for tax purposes. You must pay tax and National Insurance at standard PAYE rates, usually calculated and deducted by an umbrella company. You do not receive the tax advantages of a limited company.

What does Outside IR35 mean?

Outside IR35 means that you are operating as a genuine independent business entity. You can pay yourself a combination of low salary and dividends from your limited company, deduct legitimate business expenses before tax, and manage your corporate taxation, keeping a significantly higher proportion of your day rate.

What is the corporate tax rate for Outside IR35 contractors?

For the 2026/27 tax year, limited companies pay Corporation Tax at 19% on profits up to £50,000. Profits above £250,000 are taxed at 25%. Profit levels between £50,000 and £250,000 are subject to a marginal relief rate of 26.5%, leading to an effective rate that scales between 19% and 25%.

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Contracting & IR35 · 2026/27

Contractor & IR35 Comparator

Audit your contract offers. Perform a three-way comparison between Inside IR35 (Umbrella), Outside IR35 (Ltd Company), and Permanent employee positions.

HMRC 2026/27 Rules · Corp Tax & Dividends Integrated · Standalone browser sandbox

Offered Day Rate

£/ day

£100£2,500

Working Days per Year

Typical full-time contract has 220 billable days

days

Annual Billing Value

£88,000

£400 × 220 billing days

Outside IR35 Annual Take-Home Net

£57,954

Equivalent to £4,829 / month

Based on a day rate of £400 over 220 days (£88,000 gross billing), operating Outside IR35 via a Limited Company yields an estimated net take-home pay of £57,954. This is £4,926 more than an equivalent Inside IR35 umbrella contract (£53,028 net).

Tax Guide & Reference (Detailed Handbook)

Decoding IR35: Inside vs. Outside and the Real Value of Your Day Rate

What is IR35? The Legislative Reality

IR35, or the "off-payroll working rules," is a piece of UK tax legislation designed to identify "disguised employees" — individuals who work through an intermediary (typically their own Personal Service Company, or PSC) but who would be treated as employees if they were hired directly by the end client.

HMRC introduced these rules to prevent tax avoidance. Under a standard limited company structure, a contractor can pay themselves a minimal salary (reducing income tax and NI) and draw the remainder as dividends (which carry lower tax rates and are completely exempt from National Insurance). If HMRC determines that the relationship behaves like employment, the contractor is deemed "Inside IR35" and must pay taxes at standard PAYE rates.

Inside IR35: Understanding the Umbrella Deduction Stack

When you accept an Inside IR35 contract, you typically contract through an intermediary known as an umbrella company. The umbrella company becomes your legal employer. They invoice the agency or end client for your day rate and run payroll for you.

The assignment rate (your gross day rate) is not your gross salary. The assignment rate must cover all employer costs. Before your gross taxable salary is calculated on your payslip, the umbrella company deducts:

Employer National Insurance: 13.8% on earnings above £9,100 per year.
Apprenticeship Levy: A 0.5% government tax on payrolls over £3m (passed down to you by almost all umbrellas).
Umbrella Margin: The weekly or monthly fee the umbrella charges to process your payroll (typically £15 to £30 per week).

Outside IR35: Ltd Company Tax Optimisation

Being Outside IR35 means you are operating a genuine business-to-business transaction. Your Limited Company invoices the client, and the revenue belongs to the company. This provides substantial tax planning flexibility.

The standard Outside IR35 extraction strategy is:

Low Salary: Pay yourself a director's salary at the Primary Threshold (£12,570) to build a qualifying year for your state pension without paying NI. This salary is a tax-deductible expense for the company.
Corporation Tax: The company pays Corporation Tax on its remaining profits. The rate is 19% on profits under £50,000, 25% on profits over £250,000, and a marginal relief rate of 26.5% in the middle.
Dividends: The remaining profit after Corporation Tax is distributed to you as dividends. Dividends carry lower tax rates and are exempt from National Insurance, creating massive tax savings compared to employment.

The Permanent Job Equivalent: What is your Day Rate Truly Worth?

To compare a contracting offer with a permanent job offer, you must look beyond the raw numbers. Permanent employment includes a range of benefits that have a direct cash value:

Paid Annual Leave: A permanent employee receives a minimum of 28 days of paid holiday (including bank holidays). A contractor only gets paid for the days they work.
Sick Pay: Permanent jobs usually include company sick pay, whereas contractors receive zero pay if they are unable to work.
Pension Employer Contributions: Employers must contribute at least 3% under auto-enrolment.
Other Perks: Health insurance, life cover, and annual performance bonuses.

Calculations are based on the latest HMRC UK tax thresholds for the 2026/27 tax year. Results are generated for educational purposes and do not constitute formal regulated financial advice. Tax rules depend on your individual circumstances and may change.