Guide
Inside vs outside IR35: what the difference costs you
Updated
Same client, same rate, same work, but IR35 status changes how every pound is taxed. Here is the difference in real numbers, and who decides which side you fall on.
What the status means
- Inside IR35
- The engagement looks like employment, so you are taxed like an employee. In practice you are paid through an umbrella company: the assignment rate funds the umbrella margin, employer NI and the apprenticeship levy before your gross pay is even calculated. See how umbrella pay works.
- Outside IR35
- You are genuinely in business on your own account. Your limited company invoices the client, pays corporation tax, and you draw a small salary plus dividends. See the limited company math.
The gap in numbers
| Day rate | Inside IR35 | Outside IR35 | Outside advantage |
|---|---|---|---|
| £300 | £45,006 | £50,570 | £5,564 |
| £400 | £56,556 | £61,432 | £4,876 |
| £500 | £68,105 | £72,293 | £4,188 |
| £600 | £75,650 | £83,155 | £7,505 |
| £700 | £84,853 | £94,016 | £9,163 |
The advantage is not a straight line: it narrows slightly through the £400–£500 range as dividend tax bites, then widens sharply above £600/day when the umbrella route starts losing the personal allowance (tapered £1 for every £2 of pay over £100,000). Outside-IR35 figures above £600/day are slightly optimistic because this comparison does not taper the allowance on dividend income, see the calculator's assumptions.
Who decides your status
For medium and large clients, the client decides and must issue a Status Determination Statement; for small companies, your own company self-assesses (gov.uk: off-payroll working). The tests are about the reality of the engagement, not the paperwork:
- Control, does the client direct how, when and where you work?
- Substitution, could you send a qualified substitute, and would the client accept one?
- Mutuality of obligation, is the client obliged to offer work and you to accept it?
HMRC's CEST tool gives a determination HMRC says it will stand behind if your answers are accurate. Keep the output with your contract papers whichever side you land on.