IR35 inside vs outside: tax comparison for UK contractors in 2025/26
Summary
Updated March 2026 — Sources: GOV.UK off-payroll working, HMRC ESM0500.
IR35 determines whether a contractor working through a limited company should be taxed as an employee. Inside IR35 engagements eliminate most tax advantages of operating a Ltd.
1. Outside IR35 — Ltd extraction
Invoice through your Ltd, pay corporation tax on profit, extract via optimal salary (£12,570) plus dividends. No employer NIC on dividends. Typical take-home on £100,000 contract income: ~£72,000–£78,000.
2. Inside IR35 — deemed payment
Your Ltd receives contract income but must treat most of it as employment income. Deemed payment = income minus 5% flat rate expenses. PAYE and employee NIC apply. Employer NIC also due. Take-home on £100,000: ~£58,000–£65,000.
3. Comparison table
| Factor | Outside IR35 | Inside IR35 |
|---|---|---|
| Corporation tax | Yes, on profit | Minimal after deemed payment |
| Dividends | Available | Not available |
| Employer NIC | On salary only | On deemed payment |
| Expenses | Full business expenses | 5% flat rate only |
| Admin burden | Higher | Lower |
4. Supporting outside status
Document substitution rights, no mutuality of obligation, control over how work is done, financial risk, and provision of own equipment. Use HMRC's CEST tool as a starting point, not a definitive answer.
5. Sources
FAQ
What does inside IR35 mean for tax?
Inside IR35, you are treated as an employee for tax purposes. Your Ltd must operate deemed payment: salary subject to PAYE and NIC on the contract income minus 5% expenses allowance.
How much more tax do I pay inside IR35?
Inside IR35 removes the dividend extraction advantage. Take-home can be 15–25% lower than outside IR35 for the same day rate, depending on salary/dividend split and expenses.
Who determines IR35 status?
For medium and large private sector clients, the client determines status and issues a Status Determination Statement (SDS). Small company clients are exempt from off-payroll rules.