How much does IR35 actually cost you?
For contractors, the difference between inside and outside IR35 is not just a compliance question. It is one of the largest single factors in annual take-home pay. Most contractors have a rough figure in their head, but the true gap, once you account for employer NI, the loss of the dividend allowance, and the end of the salary/dividend split, is usually larger than expected. Enter your day rate to see the real numbers.
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See real take-home including IR35 deemed-employment rules.
What is IR35?
IR35 is the UK's off-payroll working legislation, introduced in 2000 and substantially reformed in 2017 (for the public sector) and 2021 (for medium and large private sector businesses). Its purpose is to ensure that contractors who work in a manner equivalent to an employee pay broadly the same tax as an employee, rather than accessing the tax advantages of operating through a limited company. If a contractor is deemed to be "inside IR35," their income is treated as employment income and taxed accordingly, even if they invoice through a limited company or use an umbrella company structure.
Inside vs outside IR35: the real financial difference
The tax gap between inside and outside IR35 is substantial. For a contractor billing £500/day (approximately £115,000/year at 46 weeks), the typical take-home difference is in the range of £15,000 to £25,000 per year. The difference arises from three main factors: inside IR35, employer NI (15% from April 2025) is deducted from the gross contract value before the contractor receives a penny; the corporation tax advantage of limited company operation is lost; and the salary/dividend split strategy that minimises employee NI and income tax is no longer available.
What is the IR35 threshold for 2025-26?
There is no single monetary "threshold" for IR35 in the way there is for income tax. IR35 applies based on the employment status characteristics of the working arrangement, not a specific income level. The key tests are: whether the contractor controls how they carry out their work (substitution rights), whether there is a mutuality of obligation between contractor and client, and whether the contractor is integrated into the client's organisation. Small client companies (turnover below £10.2 million, fewer than 50 employees, or balance sheet below £5.1 million) must meet two of these three criteria to qualify as small, which shifts the IR35 assessment responsibility to the contractor.
Frequently asked questions
From April 2025, the employer NI rate increased from 13.8% to 15%, and the secondary threshold (the salary level above which employer NI is charged) dropped from £9,100 to £5,000 per year. For inside-IR35 contractors paid via umbrella companies, this means the employer NI deducted from their contract value has increased. For a £550/day contract (approximately £126,500/year), employer NI inside IR35 is now approximately £18,225/year (15% on earnings above £5,000), versus approximately £15,982 under the old rates. This effectively reduced inside-IR35 take-home pay by approximately £2,200/year from April 2025.
Outside IR35, a limited company can claim legitimate business expenses against corporation tax, including: professional subscriptions and memberships, accountancy fees, business insurance (professional indemnity, public liability), office costs, equipment and technology used exclusively for business, training and development directly related to the contracting work, and travel to client sites that are not a permanent workplace. This calculator assumes approximately £5,000/year in allowable expenses, which is a conservative estimate. Individual circumstances vary; consult a contractor accountant for your specific situation.
Not exactly, but in practice the tax treatment is similar. An umbrella company employs the contractor and bills the end client. The contractor receives a salary from the umbrella company, with employer NI, employee NI, and income tax all deducted. Umbrella companies also charge a margin (typically £20-£30/week). The net take-home is comparable to what you would receive if you were directly employed inside IR35 via a limited company. Some contractors prefer umbrellas for simplicity; others use limited companies operating inside IR35. The financial outcome is broadly similar.
Outside IR35, the common strategy is to pay yourself a low salary (typically at or around the personal allowance level of £12,570) to minimise employer and employee NI, then take the remaining profit as dividends. Dividends above the £500 allowance are taxed at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate), which is substantially lower than income tax and NI on the equivalent salary. This calculator models this standard approach. The optimal salary level may differ depending on whether your company has other employees or whether you want to build a National Insurance qualifying year for state pension purposes.
- HMRC. Understanding off-payroll working (IR35). GOV.UK 2025. gov.uk.
- HMRC. Income Tax rates and allowances 2025-26. gov.uk.
- HMRC. National Insurance rates 2025-26. gov.uk.