Understanding IR35 and off-payroll working rules
IR35 (the off-payroll working legislation) was established by HMRC to ensure that contractors working like regular employees pay broadly the same Income Tax and National Insurance contributions as direct staff.
When a contract is deemed outside IR35, you invoice the client through your own Personal Service Company. Your limited company pays Corporation Tax on profits (19% up to £50,000, 25% above £250,000, with marginal relief between), and you can distribute funds using an optimal combination of low director salary and dividend distributions.
When an assignment falls inside IR35, all invoice earnings are treated as deemed employment income. Employer National Insurance contributions (15% from April 2025 above £5,000) and the 0.5% Apprenticeship Levy are deducted from the gross fee invoice, alongside umbrella company administrative margins, before standard PAYE Income Tax and employee National Insurance are deducted from your gross taxable salary.
Worked example: £500 daily rate inside vs outside IR35
Consider a UK contractor billing £500 per day over 230 days in the 2026-27 tax year, generating £115,000 in gross annual contract revenue, with £1,500 in annual allowable business expenses outside IR35.
Outside IR35 (Limited Company): Operating outside IR35 through a limited company yields an annual net take-home pay of £73,669.73, equivalent to £6,139.14 per month. This represents an outside IR35 retention rate of 64.06% of total revenue, after paying £39,830.27 in combined Corporation Tax and dividend tax.
Inside IR35 (Umbrella Company): Operating inside IR35 with a £25 weekly umbrella company margin yields an annual net take-home pay of £68,030.13, equivalent to £5,669.18 per month. This reflects an inside retention rate of 59.16% after £46,969.87 in total employer and employee statutory deductions.
Under these contract parameters, operating outside IR35 provides an annual take-home advantage of £5,639.60.
Inputs for the IR35 calculator
How you quote your contract rate
Choose whether you enter your contractor compensation as a daily rate, an hourly rate, or a total annual contract billing value.
Daily contract rate
Your agreed daily invoice rate charged to the recruitment agency or end client, excluding VAT.
Invoiced days per year
The number of working days you expect to bill during the tax year, typically 220 to 230 days allowing for annual leave and bank holidays.
Annual allowable company expenses (outside IR35)
Anticipated annual limited company business expenses such as professional insurances, accountancy fees, software subscriptions, and computer equipment.
Weekly umbrella company margin (inside IR35)
The administrative margin charged by your umbrella company per pay period, typically between £20 and £30 per working week.
Tax year
The applicable UK tax year for Income Tax, National Insurance, and Corporation Tax rates.
Where you pay income tax
Choose Scotland if you are a Scottish tax resident, which applies Scottish Income Tax bands to your director salary and deemed employment income.
Student loan repayment plan
Select your UK student loan plan if applicable to deduct repayments from PAYE salary and dividend distributions.
CALCULATOR QUESTIONS
IR35 calculator questions
What is the difference between inside and outside IR35 take-home pay?
Outside IR35 contractors retain more take-home pay because their limited company can claim allowable business expenses, pay the lower dividend tax rate instead of employee National Insurance, and avoid paying employer National Insurance and Apprenticeship Levy out of the invoice total.
Who determines IR35 status for a UK contract?
Since April 2021, medium and large private sector businesses and public sector organisations are legally responsible for determining the IR35 status of contractors and issuing a Status Determination Statement. Small business clients remain exempt, leaving status determination with the contractor's own PSC.
How do umbrella companies calculate pay inside IR35?
An umbrella company receives the assignment rate from the agency or client, deducts statutory employer costs (Employer NI, Apprenticeship Levy, and employer pension) plus its own margin fee, and processes the remaining balance through PAYE for Income Tax and employee NI.
Can I claim travel expenses inside IR35?
Generally no. Under supervision, direction, or control rules, contractors working inside IR35 through an umbrella cannot claim tax relief for ordinary travel and subsistence between their home and the client workplace.