IR35 and contractor take-home
IR35 decides whether you're genuinely in business or a 'disguised employee'. It dramatically changes your take-home. This guide explains the difference and how the numbers work.
What IR35 is
IR35 (the off-payroll working rules) asks whether, ignoring your limited company, you'd be an employee of the client. If the working relationship looks like employment, control, no right of substitution, mutuality of obligation, you're inside IR35 and taxed like an employee. If you're genuinely in business on your own account, you're outside IR35 and can use the tax-efficient salary-plus-dividends model. For most medium and large clients, the client (not you) decides your status.
The limited-company model
Working outside IR35 through your own company, you typically take a small salary (around the £12,570 allowance) and the rest as dividends from post-Corporation-Tax profit. This avoids most National Insurance and uses lower dividend tax rates, so your retained income is higher. You also control timing, can pay into a pension from the company, and may use the VAT flat-rate scheme, but you carry the admin and the risk of getting status wrong.
Umbrella and PAYE
Inside IR35, your fee is treated as employment income. Via an umbrella company, the assignment rate must cover employer's National Insurance (15%), the apprenticeship levy and the umbrella's margin before your gross pay is worked out, then you pay PAYE Income Tax and employee NI on that. The result is materially lower take-home than outside IR35, which is why the determination matters so much. Always check whether a quoted rate is the "assignment rate" (umbrella) or your gross.
Negotiate a higher inside rate
Getting the determination right
Status is about the reality of the engagement, not the contract wording alone. Key tests are control (how/when/where you work), substitution (can you send someone else?), and mutuality of obligation. HMRC's CEST tool gives an indication, but many contractors get an independent contract-and-working-practices review. Operating outside IR35 when you're really inside can lead to back-taxes, interest and penalties.
Common mistakes
- Confusing assignment rate with gross pay. Umbrella assignment rates include employer NI and margin, your gross is lower.
- Assuming a contract clause sets status. Actual working practices matter more than wording. Get a proper status review.
- Working outside IR35 without evidence. If HMRC disagrees, you face back-tax and penalties. Document genuine business behaviour.
- Ignoring pension contributions. Company pension contributions are very efficient outside IR35 and reduce Corporation Tax.