Inside vs outside IR35 - the headline difference
| Day rate | Annual gross | Inside IR35 (umbrella) | Outside IR35 (Ltd co) | Difference |
|---|---|---|---|---|
| £400 | £100K | ~£64K | ~£75K | +£11K |
| £500 | £125K | ~£77K | ~£91K | +£14K |
| £600 | £150K | ~£89K | ~£106K | +£17K |
| £800 | £200K | ~£113K | ~£135K | +£22K |
These are illustrative figures assuming 220 working days per year and no other income. Actual take-home depends on expenses claimed, pension contributions, and any other income you have.
How outside-IR35 limited company contractors are taxed
- Day rate × days worked = company turnover.
- Deduct allowable expenses. What's left is profit before tax.
- Pay yourself a small salary up to the personal allowance threshold (typically £12,570 in 2025/26).
- Company pays 19-25% Corporation Tax on remaining profit.
- Distribute remaining post-CT profit as dividends.
- Personal tax on dividends: 8.75% basic rate, 33.75% higher rate, 39.35% additional rate (after the £500 dividend allowance).
How inside-IR35 contractors are taxed
Inside IR35 means the contract relationship is genuinely employment-like. Tax flows similar to a payroll employee:
- If working through an umbrella company: PAYE Income Tax, employee NI, employer NI (deducted from your day rate before payment), apprenticeship levy, and umbrella margin (£20-30/week).
- Take-home is typically 60-65% of day rate, with limited scope for tax planning.
- Expenses are mostly NOT claimable (unlike outside-IR35 limited company contractors).
Frequently asked questions
Should I be inside or outside IR35?+
It depends on the actual working relationship - the contract terms, who controls how/when/where the work is done, whether you can substitute, and whether you genuinely operate as a business. A specialist will run a Status Determination Statement assessment. The wrong answer is expensive in either direction.
Can I split contracts between inside and outside?+
Yes - many contractors run a mix. Inside contracts go via an umbrella; outside contracts go via your limited company. A specialist accountant will help you structure this without triggering HMRC scrutiny.
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