Take-Home: Inside vs Outside IR35

What is IR35 and why does it matter for take-home?

IR35 is the popular name for a body of UK tax legislation, formally Chapter 8 (and the more recent Chapter 10 / off-payroll working rules) of the Income Tax (Earnings and Pensions) Act 2003. Its purpose is to stop people who would otherwise be employees from paying less tax simply by inserting an intermediary company between themselves and the work.

If your engagement is inside IR35, you (or, since April 2021 in the private sector, your end-client) must treat the payments as deemed-employment income. Income tax and National Insurance get deducted at PAYE rates, on roughly the same basis as an employee. The classic Ltd-Co advantages — extracting via a low salary plus dividends, retaining profits, employer pension contributions before corporation tax — disappear.

If your engagement is outside IR35, you can operate through a Ltd Co and use the standard director-extraction toolkit — the same one our Salary-Dividend Split Optimiser solves. The tax efficiency is materially better but the responsibility for getting the status determination right sits with the client (large/medium private-sector clients) or, for small clients and overseas engagements, with you.

This calculator doesn't decide your status

Status is a question of contract and working practices. The three classic tests — control, substitution and mutuality of obligation — come from the case law starting with Ready Mixed Concrete (1968) and have been refined through every major IR35 case since. HMRC's own CEST tool is the formal way to get an opinion, but it's controversial — independent IR35 specialists frequently disagree with CEST outputs, and tribunals have repeatedly ruled against HMRC's CEST-aligned determinations.

For that reason, this calculator simply compares the two financial scenarios for someone who already knows their status. Use it to:

• Decide whether a specific inside-IR35 offer beats an outside-IR35 offer at a different day rate.
• Negotiate the day-rate uplift you need to break even when a previously-outside role is converted to inside.
• Quantify the tax-efficiency gap that justifies the genuine business risks of operating outside IR35 (cost of professional indemnity, accountancy, IR35 insurance, status investigation defence).

How the maths works

Inside IR35 (umbrella / deemed employment)

Money flows from the end-client (or agency) to your umbrella company. The umbrella deducts:

1. Its own fee — typically £25–£35/week (£1,300–£1,800/yr).
2. Apprenticeship Levy (0.5%) if the agency/umbrella passes it through. Legally this is only due once a paybill exceeds £3M (HMRC PAYE32), but many pass-through models still charge it. The checkbox lets you model either treatment.
3. Employer NI at 15% above £5,000 (the Secondary Threshold for 2026/27, per HMRC's published NI rates). This is paid out of the assignment value before any salary is set.
4. The remainder becomes your gross deemed salary, on which you pay income tax at 20% / 40% / 45% (rUK) and employee NI at 8% / 2%, all on the standard 2026/27 thresholds.

If you opt for pension salary sacrifice, the sacrifice comes off the gross before employer NI is calculated — so you save income tax + employee NI on the sacrificed amount, and the umbrella saves employer NI on it (which a clean umbrella will pass back to you). For a 40% taxpayer that's roughly a 49% saving on every £1 sacrificed — by far the most tax-efficient lever inside-IR35.

Outside IR35 (Ltd Co)

Day rate × billable days = company turnover. From this we subtract reasonable business expenses (accountancy, insurance, software, training, etc.). The remainder is the profit pool. We then run the Salary–Dividend Split Optimiser on this pool, with the user's desired pension contribution treated as an employer contribution (deductible from corporation tax, no NI on either side).

The optimiser solves for the (salary, dividend, pension) triple that maximises director net wealth, taking into account every interaction in the UK tax code:

• The £12,570 personal allowance and its 60% effective taper above £100,000 income.
• The £50,270 higher-rate threshold for both income tax and dividend tax.
• The £125,140 additional-rate threshold.
• The £500 dividend allowance.
• The £50,000 / £250,000 corporation-tax small/main profit thresholds and the marginal-relief band between them (26.5% effective marginal CT rate).
• The £60,000 pension Annual Allowance and the tapered AA from £260,000 adjusted income.

The break-even day rate explained

The single most important number this calculator produces is the break-even day rate. It answers the question every contractor asks when an outside-IR35 contract gets "renewed" as inside-IR35: "What day rate would I need on the new inside contract to be no worse off?"

We compute this by bisection on the day-rate axis: holding all the other inputs constant, we find the inside-IR35 day rate that produces the same net cash as the current outside-IR35 plan. The result is exact to within £0.50/yr.

A representative example: a £500/day, 220-day contractor outside-IR35 with £3,000 of business expenses takes home roughly £71,000/year net on default assumptions. To match that on an umbrella PAYE inside-IR35 setup, the day rate would need to rise to around £640/day — a +28% uplift. Most agencies will not match this when they "convert" a contract; the calculator quantifies how much you'd be giving up.

Important things this calculator does not model

• Student loans. Plan 1, 2, 4, Postgraduate — these are income-contingent deductions through PAYE inside-IR35 and through self-assessment outside-IR35. We will add them as an optional toggle in a future revision.
• High Income Child Benefit Charge (HICBC). Above £60,000 adjusted net income, child benefit starts to taper at 1% per £200 of income, fully tapered by £80,000 (post-April-2024 rules, gov.uk/child-benefit-tax-charge). For families this is a material additional consideration.
• Scottish income tax rates. Scotland has separate income tax bands and rates (Starter, Basic, Intermediate, Higher, Advanced, Top). This calculator uses rUK rates only.
• VAT. Outside-IR35 contractors above £90,000 turnover must register for VAT, but VAT is generally output-tax on the gross plus input-tax recovery — it doesn't change personal take-home if you charge VAT on top of your fee. The Flat Rate Scheme can be a small bonus (typically £500–£2,000/yr) for eligible businesses and we'll add it as a toggle.
• Off-payroll status risk. If HMRC successfully challenges an outside-IR35 status determination, the bill (back tax, NI, penalties, interest) can be substantial. Status determination is a separate problem from extraction maths; the calculator addresses the latter.
• Multi-year planning. Retaining profits in the Ltd Co for later extraction, carry-forward of pension allowance, sequence of contracts with mixed status — none of these are modelled. The calculator answers a one-year question.

Sources & further reading

• HMRC — Understanding off-payroll working (IR35)
• HMRC Employment Status Manual (ESM) — definitive guidance on status determination.
• HMRC CEST tool — official status check.
• HMRC income tax rates and allowances
• HMRC National Insurance contributions
• HMRC Corporation Tax rates
• HMRC Pensions Tax Manual
• HMRC Apprenticeship Levy guidance

This calculator runs entirely in your browser. We do not store, log or transmit your inputs to any server. See the disclaimer for the usual warnings about why a calculator is not a substitute for an accountant or an IR35 specialist.