The “IR35 inside vs outside” debate tends to generate a lot of heat and surprisingly little actual maths. Contractors switching between roles, or being pushed inside IR35 by their clients, often have no real idea how much they are going to lose until the first payslip arrives.
This article runs through the numbers at three common UK day rates — £400, £500, and £600 — using 2024/25 tax rates. All figures assume 46 working weeks per year (allowing for holidays and gaps between contracts). The outside IR35 scenario assumes you operate through your own limited company, taking a small salary and dividends in the standard way.
All calculations are based on published HMRC rates for 2024/25. Tax rates, NI thresholds, and dividend allowances can all change year on year, so treat these as illustrations rather than personal tax advice.
2024/25 Tax Rates Used in These Calculations
- Personal allowance: £12,570
- Basic rate income tax: 20% (£12,571–£50,270)
- Higher rate income tax: 40% (£50,271–£125,140)
- Employee NI (Class 1): 8% (£12,570–£50,270)
- Corporation tax: 25% (profits above £50,000)
- Dividend allowance: £500
- Basic rate dividend tax: 8.75%
- Higher rate dividend tax: 33.75%
£400/day (£92,000 annual gross)
5 days/week × 46 weeks
Outside IR35 (Ltd Co)
- Gross revenue£92,000
- Salary (at personal allowance)£12,570
- Corporation tax (~25%)−£19,858
- Dividends available£59,572
- Dividend tax−£6,534
- Approx. take-home£65,608
~71% of gross revenue
Inside IR35 (Umbrella)
- Assignment rate£92,000
- Umbrella margin (~£25/wk)−£1,150
- Employer NI (~13.8%)−£10,970
- Gross PAYE salary£79,880
- Income tax−£21,532
- Employee NI−£3,026
- Approx. take-home£55,322
~60% of assignment rate
£500/day (£115,000 annual gross)
5 days/week × 46 weeks
Outside IR35 (Ltd Co)
- Gross revenue£115,000
- Salary (at personal allowance)£12,570
- Corporation tax (~25%)−£25,608
- Dividends available£76,822
- Dividend tax−£12,409
- Approx. take-home£76,983
~67% of gross revenue
Inside IR35 (Umbrella)
- Assignment rate£115,000
- Umbrella margin−£1,150
- Employer NI (~13.8%)−£14,090
- Gross PAYE salary£99,760
- Income tax−£32,580
- Employee NI−£3,534
- Approx. take-home£63,646
~55% of assignment rate
£600/day (£138,000 annual gross)
5 days/week × 46 weeks
Outside IR35 (Ltd Co)
- Gross revenue£138,000
- Salary (at personal allowance)£12,570
- Corporation tax (~25%)−£31,358
- Dividends available£94,072
- Dividend tax−£18,403
- Approx. take-home£88,239
~64% of gross revenue
Inside IR35 (Umbrella)
- Assignment rate£138,000
- Umbrella margin−£1,150
- Employer NI (~13.8%)−£17,210
- Gross PAYE salary£119,640
- Income tax−£43,792
- Employee NI−£3,534
- Approx. take-home£72,314
~52% of assignment rate
When Inside IR35 Is Not as Damaging as It Looks
The raw numbers above assume the outside IR35 contractor is extracting everything as salary and dividends. In practice, there are a few situations where the gap narrows or even reverses:
- →Inside rate premium. Many contractors working inside IR35 successfully negotiate a higher day rate to compensate for the tax difference. If the client budgets on an all-in cost basis, they will often accept a higher gross rate for an inside engagement because they are paying employer NI either way. A rate uplift of 15–20% can close most of the gap.
- →Salary sacrifice pension. Inside IR35 via umbrella, salary sacrifice pension contributions reduce both income tax and NI. Sacrificing £10,000–£20,000 annually into a pension can reduce the effective difference to a few thousand pounds per year — while also building a substantial pension pot. See our tax optimisation guide for the detail.
- →Statutory employment rights. Umbrella employees are entitled to statutory sick pay, statutory maternity/paternity pay, and redundancy rights. For contractors who value those protections, the net benefit calculation looks different.
- →Accountancy savings. Running a limited company typically costs £1,500–£3,000 per year in accountancy fees and administrative time. Inside IR35 via umbrella, those costs disappear. It does not close the gap, but it is worth factoring in.
What Changed in 2021 (and Why It Still Matters)
Prior to April 2021, contractors operating outside IR35 determined their own status. The off-payroll working reform shifted that responsibility to medium and large end-client businesses. The practical result was that many clients, not wanting the liability, defaulted every contractor to inside IR35 regardless of the actual working arrangement.
The reform did not change who has to pay the tax — it changed who has to assess and carry the risk. Small companies (under the Companies Act threshold for two of: <£10.2m turnover, <£5.1m balance sheet, <50 employees) are still exempt, meaning contractors working for small businesses still self-determine their status.
HMRC’s Check Employment Status for Tax (CEST) tool is the official assessment route, though it has been widely criticised for not covering all the relevant case law. A formal status review from a specialist like QDOS or Kingsbridge is worth the cost if you are working a high-value outside IR35 engagement.
Further Reading
- HMRC: Understand your IR35 status
- HMRC CEST tool — check employment status for tax
- Contractor Calculator— detailed take-home calculators for inside and outside IR35
- HMRC: Income tax rates and personal allowances