What outside IR35 actually means for your take-home
If you're a contractor operating outside IR35, HMRC treats your limited company as a genuinely independent business, not a disguised employment. You can take a small salary, draw dividends, claim company expenses and make pension contributions — all at corporation tax and dividend tax rates rather than full PAYE.
Inside IR35 collapses that. The whole contract rate is treated as deemed employment income, taxed at income tax (20% / 40% / 45%) and employee Class 1 NI (8% / 2%), with the client or fee-payer deducting it at source. No dividends, no company expenses, no split.
How the outside-IR35 number is built
For the outside-IR35 path we use the standard 2025/26 contractor setup:
- Director salary £12,570 — uses the full personal allowance tax-free. Employer NI of £1,135 is paid raw (single-director companies cannot claim the £10,500 Employment Allowance per GOV.UK).
- Corporation tax — 19% on the first £50,000 of profit, tapering to 25% via marginal relief between £50,000 and £250,000.
- Dividend tax — £500 allowance, then 8.75% / 33.75% / 39.35% depending on your total personal income band.
- Allowable expenses and pension — reduce taxable profit before corporation tax.
How the inside-IR35 comparison is built
Under Chapter 10 ITEPA (the off-payroll rules), the fee-payer — usually the client or a recruitment agency — calculates employer NI out of the contract rate, then pays what's left as deemed salary. PAYE income tax and employee Class 1 NI are withheld at source. The effective deduction on a £500/day contract is material: employer NI alone takes 13% off the top before any personal tax.
A £500/day contractor working 220 days grosses £110,000. Outside IR35, a typical take-home is around £70,500 after all taxes. Deemed inside IR35 (via umbrella or the off-payroll rules), take-home drops to roughly £66,400 — a £4,000–£5,000 annual difference, plus you lose the ability to claim allowable business expenses or defer income for tax planning.— GoForma technical team, 2025/26 tax year modelling
How HMRC decides your IR35 status
Three factors dominate in the case law and in CEST:
- Control — how, when and where you do the work. A client that directs your day-to-day looks like an employer.
- Substitution — can you send a qualified replacement in your place? A genuine, unfettered right of substitution is a strong outside-IR35 indicator.
- Mutuality of obligation — is the client obliged to offer work and are you obliged to accept? Project-based contracts with defined deliverables suggest no MOO.
Financial risk, equipment ownership and whether you're "part and parcel" of the client's organisation are secondary but relevant. Run your engagement through HMRC's Check Employment Status for Tax (CEST) tool and keep contemporaneous evidence of the working practices — not just the contract clauses.
Common mistakes outside-IR35 contractors make
- Treating contract wording as sufficient — HMRC looks at working practices, not just what the contract says.
- Over-claiming expenses — only wholly and exclusively business expenses qualify. Entertaining clients, personal mileage and home-office overclaims routinely get pulled in enquiries.
- Forgetting the dividend allowance drop — from £2,000 in 2022/23 to £500 in 2025/26 means your first £500 of dividends is tax-free, not £2,000. This hits breakeven maths more than most contractors realise.
- Not reviewing at end of engagement — status can shift mid-contract if the reality on the ground changes. A quarterly self-check keeps you covered.