IR35 explained for contractors
IR35 sounds complicated, but the core idea is simple: are you genuinely in business for yourself, or working like an employee? Here's what that means for your pay.
What this assumes
The outside-IR35 figure assumes a limited company taking a salary at the personal allowance plus dividends, with no Employment Allowance (typical for a single director). The inside-IR35 figure is modelled like PAYE, where employer National Insurance and the apprenticeship levy come out of the assignment rate before income tax and employee NI. Expenses, pensions and other income aren't included.
Source: HMRC — off-payroll working (IR35)
This is an estimate to help you plan, not financial, tax or legal advice.
What this calculator shows
IR35 is the rule that decides whether you’re genuinely in business for yourself or really working like an employee. The financial consequence is blunt: outside IR35 you can pay yourself the tax-efficient way — a modest salary plus dividends — while inside IR35 you’re taxed much like an employee and that efficiency disappears. This tool puts a number on the gap for your specific day rate.
A worked example
Take a contractor on £450 a day working 220 days — an assignment value of £99,000. Outside IR35, after a small salary, corporation tax and dividend tax, the take-home lands materially higher than inside IR35, where the whole amount runs through PAYE and absorbs employer National Insurance and the apprenticeship levy first. The difference on a contract like that is typically several thousand pounds a year. Put your own rate in above to see your figure.
Why the gap exists
The advantage outside IR35 comes from dividends, which are taxed at lower rates than salary and aren’t subject to National Insurance. Inside IR35, you can’t use that route, and the assignment rate has to cover the employer’s costs before your pay is even calculated. It’s the same mechanism that drives the umbrella vs limited company comparison — IR35 status is the hinge the whole decision turns on.
How to use the result
Treat the difference as the real value of an outside-IR35 determination. If a client offers an inside-IR35 contract at the same rate as an outside one elsewhere, this is the gap you’re weighing. If you’re unsure which side of the line a contract sits, the IR35 explainer walks through the factors — control, substitution and mutuality of obligation — that decide it.
General information, not tax or legal advice. IR35 is fact-specific and the cost of getting it wrong can be high — take professional advice and check HMRC’s guidance.
