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Inside vs Outside IR35 Explained: What It Means for Your Take-Home Pay in 2026/27
IR35 is a set of tax rules that determine whether HMRC treats you as a “disguised employee” for tax purposes. If your contract is inside IR35, you pay tax and National Insurance at rates similar to a permanent employee — but without the employment rights. If you’re outside IR35, you can pay yourself through a limited company using the more tax-efficient salary-plus-dividends model. At a £500/day rate in 2026/27, the difference is £6,251 per year.
Key facts (2026/27 tax year):
- Outside IR35 take-home at £500/day: £72,765
- Inside IR35 take-home at £500/day: £66,515
- Annual difference: £6,251
- Who decides: the end-client (medium/large companies) or you (small companies)
- HMRC’s tool: Check Employment Status for Tax (CEST)
Check your IR35 status with our free assessment tool →
What IR35 actually means
IR35 — officially the “off-payroll working rules” — was introduced in 2000 to tackle contractors who were doing the same job as employees but paying significantly less tax by working through a limited company. The name comes from the Inland Revenue press release that announced it (IR35).
In practical terms, IR35 asks one question: if you strip away the corporate structure, would this person be an employee?
If the answer is yes, the contract is “inside IR35” (also called “caught by IR35”), and the contractor’s income is taxed as employment income. If the answer is no, the contract is “outside IR35,” and the contractor can continue to use the limited company tax structure.
The distinction matters because employment income is subject to income tax, employee NI, and employer NI — while dividends from a limited company are taxed at lower rates.
Who decides your IR35 status?
This depends on the size of the end-client — the organisation you actually do the work for.
| End-client size | Who makes the determination | Since when |
|---|---|---|
| Medium or large (private sector) | The end-client | April 2021 |
| Public sector | The end-client | April 2017 |
| Small company (private sector) | The contractor | Since IR35 began |
A “small company” meets at least two of: turnover under £10.2 million, balance sheet under £5.1 million, fewer than 50 employees. In practice, most agencies and large corporate clients are making the determination — not the contractor.
When the end-client makes the determination, they must issue a Status Determination Statement (SDS) explaining their reasoning. You have the right to dispute this determination, and the end-client must respond within 45 days.
The financial impact: real numbers at three day rates
Here’s what IR35 status actually means for your take-home pay in 2026/27, assuming 232 working days and a £12,570 salary for the Ltd company route.
| £350/day | £500/day | £700/day | |
|---|---|---|---|
| Annual gross | £81,200 | £116,000 | £162,400 |
| Outside IR35 (Ltd company) | £56,332 | £72,765 | £94,660 |
| Inside IR35 | £49,841 | £66,515 | £82,607 |
| Annual difference | £6,491 | £6,251 | £12,054 |
| Monthly difference | £541 | £521 | £1,005 |
At £350/day, the inside-IR35 hit costs you £6,491 per year. At £700/day, it’s over £12,000. The jump at higher rates happens because the personal allowance taper kicks in — at £700/day, your inside-IR35 taxable income (£134,809) is above the £125,140 threshold, wiping out your personal allowance entirely.
A contractor on a £500/day rate inside IR35 takes home £66,515 in 2026/27 — roughly £6,251 less than the same rate outside IR35. That gap represents the combined effect of employer NI, the loss of the dividend tax advantage, and the 5% expense allowance.
See the full comparison for your specific day rate →
Why the gap exists
Three things drive the difference between inside and outside IR35:
1. Employer National Insurance
Inside IR35, employer NI (15% above £5,000) is deducted from your fee before you’re paid. At £500/day, that’s £13,722 — money that comes out of your gross income, not on top of it.
Outside IR35, your limited company only pays employer NI on your small salary (£12,570), which costs just £1,136. The rest of your income is extracted as dividends, which aren’t subject to NI at all.
2. Dividend tax vs income tax
Outside IR35, most of your income comes as dividends, taxed at 10.75% (basic rate) or 35.75% (higher rate) in 2026/27.
Inside IR35, all your income is taxed as employment income at 20% (basic) and 40% (higher). That’s roughly double the basic rate and slightly higher than the dividend higher rate — and there’s no £500 dividend allowance.
3. The 5% expense allowance
Inside IR35 through your own limited company, you can deduct 5% of gross income as a deemed expense before calculating deemed employment income. At £500/day, that’s £5,800. This partially offsets the IR35 hit but doesn’t come close to eliminating it.
How IR35 status is determined
HMRC uses three main tests to decide whether a contract is genuinely self-employed or disguised employment:
Supervision, direction, and control
Does the end-client tell you how to do the work, not just what needs to be done? If they dictate your working methods, hours, and location with no flexibility, that points to employment.
Outside IR35 looks like: You decide how to deliver the work, choose your own tools and methods, and have flexibility over when and where you work.
Inside IR35 looks like: You follow the client’s processes, attend mandatory meetings, use their equipment, and work set hours at their office.
Right of substitution
Could you send someone else to do the work in your place? A genuine right of substitution is a strong indicator of self-employment.
Outside IR35 looks like: Your contract includes an unrestricted right to send a qualified substitute, and you’d bear the cost. Ideally, you’ve actually exercised this right.
Inside IR35 looks like: The client expects you personally, your contract doesn’t mention substitution, or any substitution clause requires client approval that would never realistically be given.
Mutuality of obligation
Is the client obliged to offer you work, and are you obliged to accept it? An ongoing obligation on both sides points to employment.
Outside IR35 looks like: You work on defined projects or deliverables, with no guarantee of future work. You can turn down assignments.
Inside IR35 looks like: You’ve been in the same role for years, work is continuously provided, and there’s an implicit expectation that you’ll keep showing up.
CEST: HMRC’s tool and its limitations
HMRC provides the Check Employment Status for Tax (CEST) tool to help determine IR35 status. End-clients are encouraged to use it when issuing Status Determination Statements.
CEST has significant limitations:
- It doesn’t consider mutuality of obligation — a factor that courts have consistently held is relevant
- It produces “unable to determine” results in a significant number of cases
- It’s been criticised by tax tribunals — several tribunal decisions have disagreed with CEST outcomes
- It can be manipulated by answering questions in a way that achieves a desired result rather than reflecting reality
CEST results are not legally binding, but HMRC will stand by its result if the questions were answered accurately. If you disagree with a CEST-based determination, you can challenge it.
Take our IR35 status assessment — it covers factors CEST misses →
What “reasonable care” means
End-clients making IR35 determinations must take “reasonable care.” If they don’t, liability for any unpaid tax shifts from the contractor’s company to the end-client.
Reasonable care means:
- Using CEST or an equivalent assessment for each individual contract (not applying blanket assessments to all contractors)
- Considering the actual working practices, not just the contract wording
- Providing a Status Determination Statement with reasons
- Responding to disputes within 45 days
- Reviewing determinations when contract terms or working practices change
Blanket assessments — where a company declares all contractors inside IR35 regardless of individual circumstances — do not meet the reasonable care standard. However, enforcement has been limited, and many contractors in practice face blanket inside-IR35 determinations, particularly in the public sector and financial services.
What to do if you disagree with a determination
If you receive an inside-IR35 determination and believe it’s wrong:
- Request the Status Determination Statement in writing if you haven’t received one
- Review the reasoning against the three main tests (control, substitution, mutuality)
- Raise a formal dispute with the end-client — they must respond within 45 days
- Gather evidence of your actual working practices (flexibility, substitution rights, project-based work)
- Consider professional advice — an IR35 specialist can review your contract and working practices (typically £200–£500 for a contract review)
- Negotiate — some end-clients will reconsider if presented with clear evidence, particularly if their initial determination was based on a template SDS rather than individual assessment
If the dispute process fails and you believe the determination is wrong, you can still take the contract inside IR35 and challenge through HMRC’s status disagreement process — but this is a longer road.
Frequently asked questions
What is IR35 in simple terms?
IR35 is a set of UK tax rules that determine whether a contractor working through a limited company is genuinely self-employed or a “disguised employee.” If you’re inside IR35, your income is taxed like an employee’s (income tax + full NI). If you’re outside IR35, you can use the more tax-efficient salary-plus-dividends model. In 2026/27, the financial difference ranges from roughly £6,000 to £12,000 per year depending on your day rate.
Who decides if a contract is inside or outside IR35?
For medium and large private-sector clients (since April 2021) and all public-sector clients (since April 2017), the end-client makes the determination. For small private-sector companies, the contractor decides their own status. A “small company” generally has turnover under £10.2 million, a balance sheet under £5.1 million, and fewer than 50 employees.
Can I still use my limited company if I’m inside IR35?
Yes. You can take inside-IR35 work through your own limited company. You’ll be taxed as a deemed employee (PAYE-style), but you retain the 5% deemed expense allowance — worth £5,800 on a £500/day rate. However, some contractors find it simpler to use an umbrella company for inside-IR35 work, since the take-home difference is minimal and the admin is lower.
What’s the difference between inside IR35 and using an umbrella company?
The tax treatment is very similar. At £500/day in 2026/27, inside IR35 through a limited company gives you approximately £66,515 take-home, while an umbrella gives approximately £67,065. The umbrella is slightly higher because the 5% deemed expense allowance in IR35 is less valuable than the umbrella’s cost structure at this rate. The main difference is administrative: an umbrella handles all PAYE, while inside IR35 through your own company requires you to run deemed payment calculations.
Is it worth contracting inside IR35?
It depends on the rate. Inside IR35 at £500/day gives you take-home pay of about £66,515 — equivalent to a permanent salary of around £85,000–£90,000 once you factor in employer pension, holiday pay, and benefits. If the contract pays enough to justify the lack of employment rights (no holiday pay, no sick pay, no redundancy), it can still be worthwhile. But at lower rates (£300–£350/day), the premium over permanent employment shrinks to the point where a permanent role may offer better overall value.
How many contractors are affected by IR35?
According to IPSE’s 2025 Confidence Index, approximately 30% of contractor engagements are now determined as inside IR35 — up from 20% in 2023/24. The proportion is higher in the public sector and financial services, where blanket inside-IR35 determinations are common. About 67% of contractors report low confidence in securing outside-IR35 work.
Not sure if your contract is inside or outside IR35? Take our free IR35 Status Assessment — it covers the key factors including control, substitution, and mutuality of obligation. Then calculate your take-home pay under each scenario.