If your contract work is caught by IR35, your take-home pay will usually be lower than if you operate outside IR35 through your own limited company. However, the size of that difference has changed significantly over the years.
On this page, we use our IR35 calculator to show the real financial impact of IR35 for the 2026/27 tax year, based on a contractor working via a UK limited company.
What happens if you are caught by IR35?
IR35, formally known as the Intermediaries Legislation, applies where a contractor supplies their services through an intermediary, usually a limited company, but works in a way that is closer to employment than genuine self-employment.
Where IR35 applies, the income from that engagement is taxed broadly in line with employment income rather than as business profits.
Since April 2021, medium and large private sector clients have been responsible for assessing IR35 status under the off-payroll working rules.
In these cases, tax and National Insurance are usually deducted at source by the fee-payer, rather than being handled through an end-of-year deemed payment calculation within the contractor’s company.
How IR35 affects tax and take-home pay
When working outside IR35 through a limited company, contractors can usually take income in the form of a combination of salary and dividends, along with allowable business expenses and pension contributions.
When working inside IR35 via a limited company, this flexibility is largely removed. Most of the contract income is treated as employment income and is subject to PAYE income tax and National Insurance.
That said, it is essential to recognise that the financial gap between inside and outside IR35 is now much smaller than it was previously.
Dividend tax rates have risen in recent years (2016 and 2026 hikes), the dividend allowance has been reduced from £5,000 to £500, and Corporation Tax rates have increased significantly since 2023.
These changes have steadily eroded the tax advantage of limited company contracting, narrowing the difference over time.
Calculating the cost of IR35 in 2026/27
Using our IR35 Calculator, the table below shows how IR35 affects annual net take-home pay at different day rates for the 2026/27 tax year, assuming the contractor operates through their own limited company.
| Daily rate | Outside IR35 | Inside IR35 | Difference |
|---|---|---|---|
| £250 | £39,585 | £36,241 | £3,344 |
| £300 | £47,182 | £42,437 | £4,745 |
| £350 | £52,459 | £47,994 | £4,465 |
| £400 | £57,654 | £53,551 | £4,103 |
| £450 | £62,848 | £59,107 | £3,741 |
| £500 | £68,943 | £64,664 | £3,379 |
| £750 | £88,485 | £86,780 | £1,705 |
| £1,000 | £112,897 | £112,211 | £686 |
Assumptions used in these examples
In all cases, we have assumed that the contractor:
- Works 5 days per week for 44 weeks per year (220 days)
- Has £1,000 in annual allowable business expenses
- Makes £3,000 in employer pension contributions
- Takes a salary of £12,570 per year when working outside IR35
- Is based in England & Wales (not Scotland)
Different assumptions will naturally produce different results. This is why figures from different IR35 calculators often vary.
What if you are inside IR35 and paid via an umbrella company?
Many contractors working inside IR35 are engaged via an umbrella company rather than through their own limited company. In these cases, employment costs, umbrella fees, and PAYE deductions are applied before the contractor is paid.
To see how this affects take-home pay, you can use our umbrella company calculator, which models income when working inside IR35 under an umbrella arrangement.
Is IR35 still financially significant?
Yes, working inside IR35 is still less tax-efficient than operating outside IR35 through a limited company.
However, the additional tax cost is now typically measured in a few thousand pounds per year rather than the much larger sums often quoted in older examples. At higher day rates in particular, the gap narrows further.
For many contractors, commercial factors such as rate, contract length, job security, and availability of work now play a much larger role in decision-making than tax alone.
Try the IR35 Calculator here to model your own situation.
Also try this great new article on how to negotiate an inside IR35 rate uplift.
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View IR35 insurance options at Qdos.
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