IR35 is the legislation that determines whether a contractor working through a personal service company (PSC) is, in effect, a disguised employee. Inside IR35 means HMRC treats your engagement as employment for tax purposes, even though you’re paid through a limited company. The income tax and NI on inside-IR35 income is significantly higher than on outside-IR35 income. This calculator runs both sides for the same day rate so you can see exactly what an IR35 status determination is worth in cash, before and after expenses, and whether to operate via your PSC or via an umbrella company under inside-IR35 arrangements.
How outside IR35 works
When you’re outside IR35, your limited company invoices the client, the client pays the company, and you decide how to extract the money. The standard pattern:
- Take a tax-efficient salary (typically £12,570 , see Director Optimal Salary).
- Pay corporation tax (19% to £50,000 of profit, 25% above £250,000) on the rest.
- Take dividends from post-tax profit, taxed at 10.75% basic-rate / 35.75% higher-rate / 39.35% additional-rate.
A contractor on a £500/day rate working 220 days outside IR35 has a company turnover of £110,000. After £5,000 of business expenses, the company has £105,000 of pre-salary profit. A £12,570 salary brings profit to £92,430, taxed at the corporation tax marginal rate (about 23.5% effective on this profit, given the marginal relief band). Tax: about £21,720. Distributable profit: £70,710. Dividends drawn: £70,710. Personal tax on the dividends: about £14,070 (after allowances and bands). Total household take-home: roughly £79,210.
How inside IR35 works through your own PSC
When you’re inside IR35 via your own limited company, the client pays the company gross but the company must apply PAYE-style tax and NI to the income , most of it taxed as if it were salary. The remaining cash after this “deemed payment” calculation can be paid to you as additional salary or kept in the company for legitimate business expenses. The maths is brutal:
- The income is largely subject to income tax at 20%/40%/45% and employee NI at 8%/2%.
- Employer NI (15%) also applies to most of the income, which the company has to pay before the PAYE calculation.
- A small expense allowance is permitted (5% of contract income for some pre-2017 inside-IR35 cases, abolished for most situations from April 2017).
The same £500/day, 220 days, £110,000 contractor inside IR35 via PSC pays roughly £40,000-£45,000 of combined tax and NI on the income, leaving £65,000-£70,000 net before any pension or other deductions. That’s about £10,000-£14,000 less than outside IR35 , the practical “cost of IR35”.
How inside IR35 works through an umbrella
If you’re inside IR35, many contractors switch to an umbrella company instead of their own PSC. The umbrella employs you and pays you a salary equivalent to the contract value, less their margin and the employer NI they have to pay on your salary. You’re a normal PAYE employee for tax purposes:
- Income tax at 20%/40%/45%
- Employee NI at 8%/2%
- Employer NI at 15% (deducted from the contract value before your salary is calculated, so effectively comes out of your pocket)
- Apprenticeship Levy on top (0.5%, again from contract value)
- Umbrella margin (typically £15-£30 per week)
The same £500/day, 220 days, £110,000 contract through an umbrella might net £64,000-£68,000 , slightly worse than inside-IR35 via PSC because the umbrella margin is a real cost the PSC route avoids.
When you’d prefer each route
- Outside IR35 (your own PSC): best take-home by a margin of £10,000-£15,000 a year on a typical contractor day rate. Available only when the engagement passes the IR35 status tests (control, mutuality of obligation, substitution).
- Inside IR35 via PSC: marginally better than umbrella because no third-party margin. Worth it if you have legitimate company expenses (training, equipment, professional subscriptions) that an umbrella wouldn’t pass through.
- Inside IR35 via umbrella: simplest. Lower take-home than PSC inside, but no PSC overhead (accountancy, dormant company filings, IR35 risk on the company’s own behalf). Many contractors use umbrella for inside-IR35 contracts and dust off the PSC for outside-IR35 work.
Status determination statements
Since April 2021 in the public sector and April 2021 for medium and large private-sector clients, the engager (the end client) is responsible for determining IR35 status and issuing a Status Determination Statement (SDS). The engager has to apply “reasonable care” to the determination and gets it wrong at their cost , they’re liable for the unpaid tax if HMRC disagrees. This has driven most large clients to take a cautious approach, often blanket-banning PSCs or applying inside-IR35 by default. Small private-sector clients are out of scope of the rules and the contractor’s own PSC remains responsible for the determination.
A poor SDS , vague, blanket-applied, or not based on the actual working practices , can be challenged through the engager’s appeal process. CEST (HMRC’s online tool) is widely seen as biased toward inside-IR35 conclusions; specialist IR35 status review services (Qdos, Bauer & Cottrell, JSA) often produce more nuanced determinations.
Key takeaways
- Outside IR35 take-home is typically £10,000-£15,000/year more than inside IR35 on the same day rate.
- Inside IR35 via your own PSC is marginally better than umbrella because no third-party margin, but operationally more complex.
- Inside IR35 via umbrella is simpler , straight PAYE with all employment tax and NI deducted at source.
- The Status Determination Statement is the engager’s responsibility for medium and large private-sector and all public-sector clients.
- Dual-track contracting (PSC for outside, umbrella for inside) is common for contractors who do both types of engagement.
Frequently asked questions
Who decides my IR35 status? For public-sector engagements and medium/large private-sector clients, the engager (end client) decides and issues a Status Determination Statement. For small private-sector clients (turnover under £10.2m, balance sheet under £5.1m, fewer than 50 employees), your own PSC is responsible for determining and applying the IR35 rules.
Can I challenge an inside-IR35 determination? Yes. The engager must operate a “client-led status disagreement process” with a 45-day response window. Specialist IR35 status review services can support a challenge with a detailed IR35 contract review. Many initial blanket determinations are reversed when challenged on specific facts.
Is the umbrella margin tax-deductible? No, not for the contractor. The umbrella margin comes off the contract value before your salary is calculated, so you effectively bear it but it doesn’t appear as a deduction on your payslip. Some umbrellas charge per week, some per pay period, some as a percentage. Compare on the basis of “net retained pay” rather than headline margin.
What if I’m wrongly inside IR35? You don’t have a direct route to challenge the engager’s determination beyond the disagreement process. Tax-efficiency-wise, the choice is between PSC inside-IR35 and umbrella inside-IR35 , both are real reductions in take-home compared to outside IR35. Some contractors leave engagements that have moved inside IR35 in favour of clearly outside-IR35 work elsewhere; the contractor market reorganises around the determination over time.