The Real Numbers First
Most articles on IR35 bury the actual figures. Here they are upfront: at a £500/day rate working 220 days per year, inside IR35 costs you approximately £15,000–£17,000 per year compared to outside IR35 through a limited company.
That is not an accounting technicality. That is a real, substantial reduction to your annual income — equivalent to around 20% of what you'd otherwise take home.
Below is a comparison table at the most common UK contractor day rates for 2025/26. Assumptions: 220 billable days, England/Wales tax rates, outside IR35 using optimal salary/dividend split (£9,100 salary), umbrella margin of £25/week.
The core inside vs outside IR35 gap changes very little in 2026/27. Dividend tax rates, income tax bands, and corporation tax rates are all unchanged. The 15% employer NI rate stays in place. The main April 2026 change — the small company threshold — affects who decides your IR35 status, not the take-home pay difference itself. Read the April 2026 changes in full →
| Day Rate | Annual Contract Value | Outside IR35 (Ltd) | Inside IR35 (Umbrella) | Annual Difference |
|---|---|---|---|---|
| £250/day | £55,000 | ~£43,500 | ~£36,200 | −£7,300 |
| £350/day | £77,000 | ~£57,800 | ~£48,400 | −£9,400 |
| £400/day | £88,000 | ~£64,200 | ~£53,600 | −£10,600 |
| £500/day | £110,000 | ~£79,500 | ~£63,500 | −£16,000 |
| £600/day | £132,000 | ~£91,800 | ~£74,200 | −£17,600 |
| £700/day | £154,000 | ~£103,000 | ~£84,600 | −£18,400 |
| £800/day | £176,000 | ~£112,400 | ~£94,900 | −£17,500 |
All figures approximate. Use the free calculator to model your exact circumstances. Outside IR35 assumes salary of £9,100 + remaining profits as dividends. Inside IR35 assumes umbrella company with 15% employer NI applied to assignment rate first.
Based on £500/day, 220 days, England. 72% of gross vs 58% of gross.
Inside vs Outside IR35: Breakdown by Day Rate
Each day rate has a slightly different story. Here's what the numbers mean at each level, and why the gap behaves the way it does across the range.
Inside vs Outside IR35 at £300/day
At £300/day (roughly £66,000 annual contract value on 220 days), outside IR35 through a limited company yields approximately £43,500 take-home. Inside IR35 via umbrella: approximately £36,200. Annual gap: around £7,300. At this rate the gap is proportionally smaller than higher rates because more of the outside IR35 income sits within the basic rate band — the compound benefit of avoiding higher-rate tax and employer NI is less dramatic. That said, £7,300/year is still a meaningful sum for a contractor at the lower end of the market where negotiating rate uplifts is hardest.
Inside vs Outside IR35 at £400/day
At £400/day (£88,000 annual contract value), outside IR35 yields approximately £64,200. Inside IR35: approximately £53,600. Gap: roughly £10,600/year. The employer NI deduction at this rate reduces the gross assignment rate by around £12,400 before your taxable pay is even calculated — a fact many online calculators and some clients misunderstand. The take-home figure inside IR35 at £400/day is often less than contractors expect when they first see an inside IR35 contract offer.
Inside vs Outside IR35 at £500/day
£500/day (£110,000 annual contract value) is the most frequently referenced rate in IR35 discussions. Outside IR35: approximately £79,500 take-home. Inside IR35: approximately £63,500. Gap: roughly £16,000/year — equivalent to roughly 20% of take-home pay. At this rate, a substantial portion of income falls into the 40% higher rate band under inside IR35, while outside IR35 the equivalent income can be extracted as dividends taxed at 33.75% after corporation tax at 19%. The double benefit of dividend rates and no employer NI is at its most powerful here.
Inside vs Outside IR35 at £600/day
At £600/day (£132,000 annual contract value), outside IR35 yields approximately £91,800. Inside IR35: approximately £74,200. Annual gap: approximately £17,600. Most income at this rate falls into the 40% higher rate band inside IR35. Outside IR35, dividend income above the £500 allowance is taxed at 33.75% — and only on after-corporation-tax profits. The compound effect of two tax efficiencies is why the gap remains large even as gross income grows.
Inside vs Outside IR35 at £700/day
At £700/day (£154,000 annual contract value), outside IR35 yields approximately £103,000. Inside IR35: approximately £84,600. Annual gap: approximately £18,400. At this rate the adjusted net income approaches the £100,000 personal allowance taper threshold for inside IR35 contractors, which can create an effective 60% marginal rate on income between £100,000 and £125,140. Outside IR35 dividend income is not subject to the same taper — this creates an additional advantage that the simple comparison table doesn't fully capture at higher rates.
Inside vs Outside IR35 at £800/day
At £800/day (£176,000 annual contract value), outside IR35 yields approximately £112,400 take-home. Inside IR35: approximately £94,900. Annual gap: approximately £17,500. The gap narrows slightly compared to £700/day because at very high income levels, additional rate tax (45%) begins to apply to both routes — reducing the relative dividend rate advantage. Inside IR35 contractors at £800/day also typically lose their personal allowance entirely (tapered away above £125,140 adjusted net income), compounding the effective tax rate on that band.
Why Is the Difference So Large?
The short answer: inside IR35 stacks multiple layers of tax that outside IR35 largely avoids. Here's what happens to your money in each scenario.
Outside IR35 — How It Works
Your limited company invoices the client. The money lands in your company account. You then extract it tax-efficiently:
- Pay yourself a salary at the National Insurance secondary threshold (£9,100 in 2025/26) — this uses part of your personal allowance, but avoids employee and employer NI entirely
- Pay corporation tax on company profits — 19% for profits under £50,000 (the small profits rate), rising to 25% for profits above £250,000
- Extract remaining post-tax profits as dividends — taxed at 8.75% (basic rate), 33.75% (higher rate) after the £500 dividend allowance
No employer NI. Dividends taxed at a much lower rate than income. This is what creates the take-home advantage.
Inside IR35 (Umbrella) — How It Works
The assignment rate your client pays goes to the umbrella first. Before you see a penny, the following deductions apply:
- Employer's NI at 15% (on earnings above the £5,000 secondary threshold) — deducted from your assignment rate before your gross pay is calculated
- Apprenticeship Levy at 0.5% — also taken from assignment rate
- Umbrella margin (~£20–30/week) — the umbrella's fee
- What remains becomes your gross employment income, then subject to income tax and employee NI exactly as if you were a permanent employee
Many online IR35 calculators — and some contractors — make a critical mistake: they treat the day rate as your gross salary when calculating inside IR35 take-home. It is not. Employer NI is deducted from the assignment rate first, before your taxable pay is even calculated. From April 2025, employer NI is 15% on earnings above £5,000, up from 13.8% above £9,100. This change alone cost the average IT contractor an extra £1,200–£1,800/year inside IR35. Our calculator models this correctly.
What Day Rate Increase Do You Need to Break Even?
If you're moving from outside to inside IR35 and want to maintain the same take-home pay, you need a meaningful rate increase. The exact figure depends on your day rate and working days, but here are approximate break-even uplifts:
| Current Day Rate (Outside IR35) | Equivalent Rate Needed Inside IR35 | Required Uplift |
|---|---|---|
| £300/day | ~£365/day | +22% |
| £400/day | ~£490/day | +23% |
| £500/day | ~£615/day | +23% |
| £600/day | ~£735/day | +23% |
| £700/day | ~£855/day | +22% |
In practice, the market rarely supports a 20%+ rate increase when a contractor moves inside IR35. Most contractors either accept the pay cut or move on to find outside IR35 contracts elsewhere. If you need to work out what day rate to target in the first place, freelanceratecalculator.net has a free UK day rate and hourly rate calculator.
Has the Gap Actually Been Narrowing?
Yes — meaningfully so over the past few years. The take-home advantage of outside IR35 has eroded due to several policy changes that specifically targeted limited company contractors:
- Corporation tax increase (2023): The main rate rose from 19% to 25% for profits above £250,000, with marginal relief between £50k–£250k. Previously all companies paid 19%. This directly reduced the post-tax pot available for dividend extraction.
- Dividend allowance cuts: The tax-free dividend allowance has been slashed from £5,000 (2016) to £2,000 (2018) to £1,000 (2023) to just £500 (2024 onwards). Every pound above that is now taxed at dividend rates.
- Employer NI rise (April 2025): The rate rose from 13.8% to 15%, and the secondary threshold dropped from £9,100 to £5,000, increasing the cost of inside IR35 engagements.
Despite this erosion, outside IR35 through a limited company remains substantially more tax-efficient than inside IR35 — particularly at higher day rates where the compound effect of avoiding employer NI and dividend vs income tax rates is most powerful.
Scotland: The Numbers Are Different
Scottish contractors face a different income tax structure, which affects the inside IR35 calculation more than outside (since dividends are not subject to Scottish income tax rates — they use UK-wide dividend tax rates regardless).
Scottish higher rate income tax kicks in at a lower threshold and at 42%, versus 40% in England. This means inside IR35 is generally more painful for Scottish contractors at equivalent day rates — a £500/day contractor in Scotland inside IR35 may take home £1,500–£2,000 less per year than an equivalent English contractor.
Select "Scotland" on our calculator to see figures with the correct Scottish bands applied.
Pension: The One Area Inside IR35 Can Partially Compete
There is one scenario where inside IR35 starts to look better: large employer pension contributions. Inside IR35, your umbrella can make employer pension contributions that reduce your employer NI liability through salary sacrifice. If your employer (umbrella) makes significant pension contributions on your behalf, the NI savings can meaningfully reduce the gap.
Outside IR35, your limited company can also make employer pension contributions — these are deductible against corporation tax and not subject to dividend tax. At high contribution levels, this broadly preserves outside IR35's advantage.
This is one area where the maths gets personal quickly. Use the calculator and factor in your pension contributions to see your specific position.
Frequently Asked Questions
Does being inside IR35 mean I'm paying too much tax?
Not necessarily — inside IR35 means you're taxed as a deemed employee, which is the amount the government considers appropriate for someone in an employment-equivalent arrangement. What it means is that you're paying more tax than you would outside IR35, where the limited company structure allows for more tax-efficient extraction. Whether that's "too much" depends on whether your status is correctly assessed.
Can I claim expenses inside IR35?
Very few. Inside IR35, the same rules as permanent employees largely apply — you cannot claim travel to a permanent workplace, subsistence, or most business expenses. Home office costs may be claimable in limited circumstances. This is another component of the financial disadvantage of inside IR35 that many calculators omit.
What's the difference between inside IR35 and being a permanent employee?
Less than you might think financially, but you retain the flexibility of contracting — no employee rights, no employment protection, no statutory sick pay at normal rates, no employer pension by default. You get the taxes of an employee with fewer of the benefits. This is often called "the worst of both worlds" by contractor advocates.
I've heard the gap is £10,000/year. Is it £10,000 or £15,000?
Both figures appear in different publications because the calculation depends heavily on assumptions — particularly whether employer NI is correctly deducted from the assignment rate, the level of business expenses claimed, pension contributions, and the number of billable days. At £500/day and 220 days, with the April 2025 employer NI rate (15%), the gap is closer to £15,000–£17,000. Older calculators using 13.8% employer NI will show smaller figures.
Does the inside vs outside IR35 gap change in 2026/27?
Very little. The major tax rates that drive the comparison — dividend tax rates (8.75%/33.75%), income tax bands, corporation tax rates, and the 15% employer NI — are all unchanged for 2026/27. The personal allowance remains frozen at £12,570. The one significant April 2026 change is the small company threshold, which affects whether you or your client decides your IR35 status — not the take-home pay difference itself. If your status changes as a result, the numbers in this page apply to your new arrangement.
What is an IR35 Status Determination Statement (SDS)?
An SDS is a written document that medium and large companies (the "fee-payer") must produce when they engage a contractor through a personal service company. It must state whether the engagement is inside or outside IR35 and give reasons. If your client qualifies as a small company from April 2026 (approximately 14,000 companies reclassify), they are exempt from issuing an SDS and you can self-determine your status instead. Challenging an SDS you disagree with starts with a formal disagreement process under the off-payroll rules — your client must respond within 45 days.