Guide
IR35 explained: inside vs outside, with real numbers
How the off-payroll rules work, who decides your status, and what an inside determination really does to your take-home pay.
IR35 decides whether you’re taxed like a business or like an employee. Being caught by it (“inside IR35”) usually costs a contractor more money than any other single tax rule, so it’s worth understanding before you agree a day rate. This guide explains how the rules work in 2026/27 and what an inside determination does to your take-home pay.
What IR35 is
IR35 is the common name for the off-payroll working rules. They apply when you work through your own limited company (an “intermediary”) but the working relationship with your client looks like employment. If it would be employment were it not for your company, the contract is inside IR35 and your income is taxed much like a salary. If you’re genuinely in business on your own account, it’s outside IR35 and you can take profit as dividends.
Who decides your status
For public sector clients, and for private sector clients that are medium or large companies, the client decides. It must take reasonable care, and give you a Status Determination Statement (SDS) explaining its reasons. If you disagree, you can challenge it, and the client has 45 days to respond.
If your private sector client is small (under the Companies Act size thresholds), you decide, through your own company, and you carry the risk if HMRC later disagrees.
The tests that matter
No single test settles it. Tribunals look at the whole picture, but three questions carry the most weight:
- Control. Does the client decide how, when and where you work, or just what you deliver? Being managed like a member of staff points inside.
- Substitution. Could your company send someone else, suitably qualified, to do the work, and would the client have to accept them? A real, unfettered right of substitution points strongly outside.
- Mutuality of obligation. Is the client obliged to offer more work, and are you obliged to take it? Ongoing obligations beyond the defined project point inside.
Other factors include financial risk (fixing mistakes at your own cost, fixed-price work), being “part and parcel” of the organisation (staff perks, line management, appearing on the org chart), and whether you work for several clients. HMRC’s free Check Employment Status for Tax (CEST) tool gives a view, but the contract and the reality of how you work both count.
What happens to your pay inside IR35
When a contract is inside IR35, the fee-payer (normally the agency) treats your fee as employment income. Employer National Insurance and the apprenticeship levy come out of the rate, then income tax and employee NI are deducted through PAYE. There’s no corporation tax and dividend route, and no 5% expenses allowance. In practice most inside-IR35 contractors switch to an umbrella company, which is what the figures below assume.
| Day rate | Outside (Ltd) | Inside (umbrella) | Inside rate to match | Uplift needed |
|---|---|---|---|---|
| £400 | £60,015 | £56,556 | £430/day | +7% |
| £500 | £70,876 | £68,105 | £535/day | +7% |
| £600 | £80,507 | £75,828 | £653/day | +9% |
| £750 | £92,169 | £90,759 | £763/day | +2% |
Assumptions: 5 days a week for 46 weeks; £3,000 a year of limited company running costs with a £12,570 salary and the rest as dividends; an umbrella margin of £25 a week; no pension contributions. England, Wales and Northern Ireland tax bands.
Negotiating an inside rate
Because the client’s budget usually doesn’t change when a role moves inside IR35, it’s worth knowing your break-even rate before you talk to the agency. Ask whether the quoted rate is the full assignment rate (before employer NI comes off) or a PAYE rate, since agencies quote both. And check whether the rate includes holiday pay: through an umbrella, holiday pay is usually paid out of your rate rather than on top of it.
Practical steps
- Read the contract for control, substitution and obligations, and make sure it reflects how you’ll actually work.
- Ask for the Status Determination Statement before you start, and keep a copy.
- Keep evidence of working like a business: other clients, your own equipment, fixed-price work, fixing defects at your own cost.
- Consider IR35 insurance or a contract review if you’re outside and working with a small client, where you carry the risk. The limited company vs umbrella guide covers what each route costs.
This guide is general information, not financial or tax advice. Figures are estimates for England, Wales and Northern Ireland; speak to an accountant before making decisions.