Inside IR35: what it means
Being “inside IR35” means you are treated as an employee for tax purposes. Your pay is subject to Income Tax and National Insurance contributions as if you were on the company’s payroll, and you cannot take most of your income as dividends. Instead you receive a deemed salary after taxes so that you broadly pay the same as an employee doing the same job.
Impact on your take‑home pay
Expect a drop in take‑home pay compared with an outside IR35 arrangement at the same gross rate. Only around 5 percent of contract revenue can be retained by your company to cover expenses; the rest is taxed as employment income. You pay income tax at your marginal rate and employee NIC, and the fee‑payer pays employer NIC. Some clients offer higher contract rates for inside IR35 roles (for example £600 per day instead of £500) to make the net outcome similar, but this is not guaranteed.
Getting paid when inside IR35
There are two common ways contractors receive their income when a contract is inside IR35:
- Via your own company (deemed payment): The party paying your invoices deducts income tax and employee NIC before the money reaches your company. They also pay employer NIC separately. Your company receives the net amount, which you can withdraw without further tax (other than any small corporation tax on the retained portion).
- Via agency payroll or an umbrella company: Instead of invoicing through your PSC, you join the agency or an umbrella company’s payroll. They become your employer for the duration of the contract, pay you through PAYE, and handle all tax deductions. For you the outcome is broadly the same, but it can simplify administration.
Employment rights
Being inside IR35 is a tax classification and does not automatically give you the same rights and benefits as an employee of the client. If you use an agency or umbrella, you become their employee and gain statutory rights under the Agency Workers Regulations, such as equal pay and holiday entitlement after 12 weeks, plus pension auto‑enrolment. You do not normally get full company benefits from the end‑client unless negotiated separately.
What to do if you’re found inside IR35
If your Status Determination Statement says you are inside IR35, consider the following steps:
- Discuss and negotiate: If you believe the determination is wrong, you can dispute it and provide evidence of your independence. Clients are sometimes willing to reconsider borderline cases, though many prefer to err on the side of caution.
- Adjust your rate or budget: Recognise the impact on your net pay and negotiate a higher rate to compensate, or plan your finances for a lower take‑home income.
- Consider an umbrella company: Many contractors use an umbrella company for inside‑IR35 work. A compliant umbrella will employ you, pay at least minimum wage plus holiday pay and provide payslips with a clear breakdown of fees. Avoid any schemes promising high untaxed “expenses” or offshore payments.
- Keep or close your company: Some contractors pause or close their limited company during long stretches of inside‑IR35 work to avoid unnecessary costs; others keep it dormant for future outside‑IR35 engagements. The right choice depends on how much outside‑IR35 work you expect.
- Stay compliant: Do not ignore an inside‑IR35 status. Ensure PAYE and NIC are paid on your earnings to avoid HMRC investigations and penalties.
Summary
Inside IR35 means paying tax like an employee and typically results in reduced take‑home pay, but it is not necessarily permanent. Each engagement should be assessed on its own merits. Umbrella companies can provide simplicity and some statutory benefits, though at the cost of higher tax and fees. By understanding what inside IR35 involves and planning accordingly you can minimise surprises and make informed decisions about whether to accept an inside‑IR35 role.
