Inside IR35: What It Means for Your Take-Home Pay

You’ve been told a contract is inside IR35, or you’re weighing one up. Here’s what IR35 means: IR35 is HMRC’s set of off-payroll working rules, which decide whether a contract should be taxed as employment. Being inside IR35 means you’re taxed like an employee for that contract.

This guide explains what inside IR35 means, how the deductions work, what it costs you at a real day rate, and the routes open to you, including keeping your limited company. For the rules themselves, start with our complete IR35 guide.

What does inside IR35 mean?

Inside IR35 meaning, in plain English: HMRC treats the engagement as deemed employment. The work looks like a job, so it’s taxed like one.

In practice, that means:

• Tax and National Insurance come off before you’re paid. Income tax and employee National Insurance contributions (NICs) are deducted under PAYE, the same system that taxes a salaried employee.
• Employer costs come out of the rate. Employer NICs and the apprenticeship levy are paid by whoever runs the payroll, and in practice they’re priced into what reaches you.
• You’re still not an employee in law. IR35 is strictly tax legislation: it does not change your legal employment status, and it does not grant you rights such as statutory holiday pay, sick pay, redundancy pay or protection against unfair dismissal from the end client (gov.uk: understanding off-payroll working). If you work through an umbrella, you become a direct employee of the umbrella company, and as its employee you do receive standard employment rights (gov.uk: working through an umbrella company).

The opposite result is being outside IR35, where your company is paid gross and you run your own tax affairs. Our guide to what outside IR35 means covers that side, and inside vs outside IR35 compared puts the two side by side.

One thing worth holding on to: status belongs to the contract, not to you. An inside determination on this engagement says nothing about the next one.

Who decides if you are inside IR35?

It depends on the size of your client.

If your end client is a medium or large organisation, or a public sector body, the client decides your status for that engagement, and should set out the decision and its reasons in a status determination statement (SDS) (gov.uk: understanding off-payroll working). If your client is small under the Companies Act size tests, the responsibility stays with you and your limited company (HMRC ESM10006). Broadly, a small company meets at least two of the following criteria:

• Annual turnover: £15 million or less.
• Balance sheet total: £7.5 million or less.
• Employees: 50 or fewer.

Our advice on the SDS is simple: the client should complete one, and we recommend requesting a copy in writing and keeping it on file with your contract. If you think the determination is wrong, you can make representations to the client, with specific reasons, and they have to consider them (HMRC ESM10015A). For the full process, see how IR35 status is decided.

What does inside IR35 actually cost you?

More than you might expect, because the employer-side costs come out of your rate as well as the employee-side ones.

Take a £500 a day contract, five days a week for 48 weeks, which is £120,000 of annual billings. Paid through an umbrella inside IR35 in 2026/27, the illustrative numbers run roughly like this:

• Umbrella margin: about £1,200 a year (£25 a week), leaving £118,800 to fund your employment.
• Employer NICs: about £14,780, at 15% on earnings above the £5,000 secondary threshold (gov.uk: rates and thresholds for employers 2026 to 2027).
• Apprenticeship levy: about £520, at 0.5% of your pay (same source).
• Your gross salary: what’s left, about £103,510.
• Income tax: about £29,540. Your personal allowance of £12,570 is tapered because gross pay is over £100,000, then 20%, 40% and, above £125,140, 45% bands apply (gov.uk: income tax rates).
• Employee NICs: about £4,080, at 8% between £12,570 and £50,270 and 2% above (gov.uk: National Insurance rates and categories).
• Take-home: about £69,890, or around £67,090 once the same £2,800 of working costs used on both sides of our model are taken off.

Run the same £120,000 through a limited company outside IR35 and the like-for-like take-home is roughly £72,770.

That’s a gap of around £5,700 a year at the same day rate: roughly £6,060 a month outside IR35, against £5,590 inside.

Treat these as illustrative rather than a quote: your tax code, pension contributions and umbrella margin all move the answer.

Three further things sting inside IR35:

• Restricted expenses. Each inside engagement is treated as a separate permanent workplace, so ordinary travel to and from the client site isn’t deductible (gov.uk: how to calculate the deemed employment payment).
• No salary and dividend planning. Inside, everything is taxed as salary under PAYE. Outside IR35 you choose your own salary and dividend mix, and you can time how you draw profit out of the company.
• Fewer pre-tax planning levers. Outside IR35, company pension contributions and legitimate business expenses come out of pre-tax profit, because your company is paid gross. Inside, pension contributions through the payroll are about the only lever left.

In short: inside IR35, you carry the employer’s costs and lose most of the planning levers. The fuller inside-vs-outside table is in our IR35 guide, and you can test your own rate with our take-home pay calculator.

How do you get paid inside IR35? Your three routes

If a contract is inside, the money has to reach you through a payroll somewhere. You’ve got three choices.

Umbrella company (PAYE)

An umbrella company employs you, invoices the agency or client for your work, and pays you a salary after deductions.

• Umbrella margin: a fixed weekly or monthly fee, taken before anything else (our example above uses £25 a week).
• Key Information Document (KID): the agency must give you one before you agree terms, showing how your rate becomes your pay (gov.uk: Key Information Document guidance). Read it line by line.
• What to check since April 2026: for money paid from 6 April 2026, the agency (or, with no agency, the end client) is responsible for making sure PAYE is operated correctly on umbrella workers, and HMRC can recover underpayments from them (gov.uk: PAYE rules for labour supply chains that include umbrella companies). Expect agencies to steer you towards umbrellas they’ve vetted, and ask for an example payslip before you sign.

Agency or client payroll

Some agencies and clients will put you on their own payroll for the contract.

• Straight PAYE: tax and NICs deducted at source with no umbrella margin.
• Least admin: nothing for you to run, but usually no choice over pension or benefits.
• Not always offered: many agencies won’t, because it creates employment obligations for them.

Keep your limited company and take a deemed payment

Your company stays in the chain. The fee-payer (usually the agency) calculates a deemed direct payment, deducts income tax and employee NICs, pays employer NICs and levy on top, and sends the net amount to your company (gov.uk: fee-payer responsibilities).

• No double tax: you can draw that net amount out of the company as salary or dividend with no further tax, up to the level of the deemed payment (HMRC ESM10030).
• When it’s worth it: you have other outside work going through the company, or you want to keep the company and its pension arrangements running without a break.
• When it isn’t: some agencies refuse to pay a personal service company (PSC) inside IR35 at all, and for a single long inside contract the extra admin buys you little.

Can you still run your limited company inside IR35?

Yes. Being inside IR35 on one contract doesn’t close your company.

Perhaps you’re wondering whether it’s worth keeping the company open at all. For many contractors, it is:

• A mixed portfolio. If you have an outside contract alongside an inside one, the outside work runs through the company as normal while the inside work is paid through an umbrella or a deemed payment.
• Keeping the company warm. A quiet company between outside contracts costs little to maintain and saves you setting up again when the next outside role comes along.
• Pension planning. Company pension contributions on your outside income remain one of the most efficient planning tools available, and they keep working while you’re inside elsewhere.

Where it stops making sense is if all your work is inside IR35 and likely to stay that way. Then a company with no gross income is just cost and filings, and closing it properly is usually the better call.

Essentially, your company is a tool for the outside work. Use it when there is some, park it when there isn’t.

Umbrella vs limited company inside IR35: which is better?

Neither wins every time. The honest comparison for an inside contract:

• Admin: umbrella wins. You’re an employee with a payslip. With a PSC deemed payment you still run the company, file accounts and reconcile the deductions.
• Cost: close. The umbrella margin is a real cost, but so are accountancy fees on a company that’s producing no gross income.
• Employment rights: umbrella wins. You get statutory employment rights from the umbrella, including holiday pay and pension auto-enrolment. A deemed payment gives you none of that.
• Ability to switch back: the PSC route wins. Your company is already there for the next outside contract, with no wind-down and restart.
• Compliance risk: from 6 April 2026, agencies and end clients carry responsibility for PAYE on umbrella workers, which should squeeze out the non-compliant operators (gov.uk: PAYE rules for umbrella supply chains). Even so, check the payslip matches the KID, and walk away from any scheme promising unusually high take-home.
• Take-home: outside IR35 wins either way. Whichever inside route you pick, the same rate worked outside IR35 leaves you around £5,700 a year better off on our example, so the bigger financial question is whether your next contract sits outside.

The short version: an umbrella is a per-contract tool, not an identity. Use it for the inside work and keep your company for the outside work. For the full decision framework, see PAYE vs umbrella vs limited compared.

What are your options if a contract is determined inside?

An inside SDS isn’t necessarily the end of the conversation. Your options, roughly in order:

• Make representations. Tell the client, with specific reasons and evidence, why you think the determination is wrong. They have to consider it and respond, and a blanket “everyone’s inside” policy falls short of the reasonable care the rules expect.
• Renegotiate for next time. Often it’s specific terms or working practices, such as control over how you work or the right to send a substitute, that tip a role inside. Our guide to working outside IR35 explains what the tests look for.
• Take it inside, deliberately. At the right rate an inside contract can still be worth having. Using the example above, a £500 a day outside role is worth roughly £570 a day inside on a like-for-like basis, so negotiate with that number in mind.
• Decline it. If the rate doesn’t move and the role isn’t right for you, you can walk away. Genuine outside roles exist, particularly for specialist skills.

Does one inside contract make everything inside?

No. IR35 status is assessed engagement by engagement, not per person or per company.

You can be inside on a six-month contract with a bank and outside on the next one with a software firm. Each determination stands on its own facts, provided the next engagement genuinely sits outside. Our guide to what outside IR35 means covers how that’s judged.

Inside IR35 FAQs

1. What does inside IR35 mean in simple terms? It means HMRC treats your contract as employment for tax purposes. Income tax and National Insurance are deducted before you’re paid, as they would be for an employee, even though you’re working through your own company.
2. How much more tax do you pay inside IR35? On our illustrative 2026/27 example at £500 a day, around £5,700 a year more than the same contract outside IR35 through a limited company. The gap grows with your rate, because employer NICs come off the top at 15%. The exact figure depends on your specific circumstances: your salary and dividend mix, pension contributions, expenses and umbrella margin all shift it.
3. Can you claim expenses inside IR35? Only what an employee could claim. Each inside engagement counts as a permanent workplace, so ordinary travel and subsistence to the client site aren’t deductible. Pension contributions through the payroll still are.
4. Can you still use your limited company inside IR35? Yes. The fee-payer can pay your company a deemed payment after tax, or you can leave the company running for outside work while an umbrella handles the inside contract.
5. Is working through an umbrella company the same as being inside IR35? Not quite. Umbrella employment is simply employment, so IR35 doesn’t apply to it. It’s the most common way of getting paid when a contract is inside, which is why the two get confused.
6. Can you be inside IR35 on one contract and outside on another? Yes. Status is decided contract by contract. Plenty of contractors run an outside engagement through their company while an unrelated inside contract is paid through an umbrella.
7. Can you challenge an inside IR35 determination? Yes. Raise your disagreement with the client, giving specific reasons and evidence. The client must consider it and either confirm the determination with reasons or withdraw it and issue a new one.
8. Should you close your company if all your work is inside IR35? If every contract is inside and that’s unlikely to change, probably yes: the company is costing you money for no benefit. If outside work is realistic in the next year or so, keeping it open can be cheaper than starting again, and it’s easier too: the company is already set up and ready to go when the next outside contract arrives.

Take-home figures are for the 2026/27 tax year, are rounded and are for illustration only. They are not tax advice; your own position depends on your rate, expenses, pension and circumstances.