Inside IR35 vs Outside IR35: Take-Home Pay Compared
IR35 status dramatically affects how much of your contract rate you actually keep. This guide explains the financial differences and your options in each scenario.
The Bottom Line
Contractors working outside IR35 typically take home 20% to 30% more than those inside IR35 on the same day rate. The difference comes from how you are taxed: outside IR35 allows tax-efficient extraction through salary and dividends from your limited company, while inside IR35 taxes you like an employee.
On a £500 per day contract, an outside IR35 contractor might take home around £85,000 to £90,000 annually, while an inside IR35 contractor could take home £65,000 to £70,000. The exact figures depend on your expenses, pension contributions, and how you structure payments.
Quick Comparison
| Factor | Outside IR35 | Inside IR35 |
|---|---|---|
| How you work | Via your own PSC | Via umbrella or PSC |
| Tax treatment | Business owner | Deemed employee |
| Salary flexibility | ||
| Dividend extraction | ||
| Employer NI paid by | Your PSC (on salary only) | Fee payer (from your rate) |
| Allowable expenses | Full business expenses | Limited (5% flat rate) |
| Typical take-home (£500/day) | ~£85,000–£90,000 | ~£65,000–£70,000 |
Figures assume 220 working days per year. Actual take-home varies based on expenses, pension, and tax planning.
How IR35 Changes Your Tax
IR35 is legislation designed to identify contractors who would be employees if engaged directly, and tax them accordingly. When a contract falls inside IR35, you are treated as a deemed employee for tax purposes, even though you work through your own limited company.
Outside IR35, you control how you extract money from your company. Most contractors pay themselves a small salary around the National Insurance threshold of £12,570, then take the rest as dividends. Dividends are taxed at lower rates than salary and do not attract National Insurance contributions.
Inside IR35, this flexibility disappears. The fee payer, usually an agency or the end client, must deduct income tax and employee National Insurance from your payments as if you were on their payroll. They also pay employer National Insurance of 15% on top, which comes out of your contract rate before you receive anything.
The 5% allowance for inside IR35 contracts lets you deduct a flat 5% of your income to cover running costs before calculating deemed employment income. While this helps slightly, it does not come close to offsetting the loss of dividend extraction and the burden of employer NI.
Real Take-Home Difference
Consider a contractor earning £500 per day over 220 days, generating £110,000 in annual contract income. The difference in take-home pay between IR35 statuses is substantial.
Outside IR35: Your company receives £110,000. After Corporation Tax at 25% on profits (around £23,000 tax on £92,000 profit after a £12,570 salary and £5,430 expenses), you have approximately £69,000 in retained profits. Combined with the net salary of around £12,000, you could extract this as dividends, paying dividend tax of roughly 10.75% to 35.75% depending on your other income. Total take-home: approximately £85,000 to £90,000.
Inside IR35: The fee payer deducts employer NI of 15% from your rate before anything else, reducing your £110,000 to around £95,650. From this deemed salary, you pay 40% income tax on higher earnings and 8% employee NI, plus the 5% expense allowance provides limited relief. Total take-home: approximately £65,000 to £70,000.
The £20,000 difference represents money lost to the higher tax burden of being treated as an employee. Over a five-year contract, this compounds to £100,000 in additional tax paid inside IR35 compared to outside.
Alternatives to Inside IR35
If your role has been determined as inside IR35, you have several options to consider, though none fully replicate the tax efficiency of genuine outside IR35 work.
Negotiate a higher rate: Many contractors working inside IR35 successfully negotiate rate increases of 10% to 20% to offset the additional tax burden. Clients who previously paid £500 per day might agree to £550 or £600, recognising the changed economics.
Use an umbrella company: While this does not reduce your tax, umbrella companies handle all payroll administration, removing the compliance burden from your PSC. Some offer additional benefits like holiday pay accrual or pension schemes that partially offset the cost.
Seek genuinely outside IR35 contracts: If your working practices support it, focus your job search on contracts where you genuinely operate as a business. This means having the right to substitute, control over how you work, and no mutuality of obligation. Some sectors and clients still offer legitimate outside IR35 opportunities.
Consider permanent employment: For some contractors, the tax advantages of contracting no longer justify the administrative burden and lack of employment rights when working inside IR35. Permanent roles often come with benefits, pension contributions, and security that can bridge the take-home gap.
Maximise pension contributions: Both inside and outside IR35, employer pension contributions remain tax-efficient. Contributing more to your pension reduces your taxable income and builds retirement savings in a tax-advantaged wrapper.
Calculate Your Take-Home Pay
Use our calculators to see exactly how IR35 status affects your earnings based on your specific day rate and working pattern.