Inside or outside IR35 — what’s the difference in your pocket?
A single day rate, two radically different tax outcomes. Inside IR35 means full PAYE — outside means salary plus dividends through your Ltd. See the exact gap.
Inside IR35
Outside IR35 ✓
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How it works
What is IR35?
IR35 (off-payroll working rules) determines whether a contractor is genuinely self-employed or — in substance — an employee of the end-client. If inside, full PAYE and NI apply. If outside, you can extract profits tax-efficiently via your Ltd company.
Who decides since April 2021?
For medium and large private-sector clients (and all public sector), the end-client decides the IR35 status. Only small companies (two of: turnover ≤ £10.2m, employees ≤ 50, balance sheet ≤ £5.1m) leave the decision to the contractor.
Inside IR35: how tax works
The fee-payer deducts employer NI from the gross contract value, then applies PAYE and employee NI to the remainder (the "deemed salary"). The contractor receives a net amount — broadly similar to direct employment.
Outside IR35: Ltd + dividends
Take a small director's salary (at or near the secondary NI threshold £5,000–£12,570) to minimise NI, pay Corporation Tax on profits, then extract the rest as dividends. Dividend tax rates (8.75%/33.75%/39.35%) are lower than income tax + NI.
The true gap
The financial difference varies significantly with day rate. On a £600/day 220-day contract (£132,000), the outside route can save £10,000–£30,000+ in tax depending on expenses and salary choice. But that must be weighed against IR35 risk and compliance costs.