What Is IR35 and Why Does It Affect Your Take-Home Pay?
IR35 is HMRC's off-payroll working legislation. If your contract is deemed inside IR35, HMRC treats your income as a deemed salary, collecting income tax and National Insurance before you receive it. If your contract is outside IR35, you can operate through a limited company, extract income as salary plus dividends, and keep significantly more.
The reform that changed everything came in April 2021, when medium and large companies became responsible for determining IR35 status (rather than the contractor). Since then, many contractors working with blue-chip clients have been pushed inside IR35 or onto umbrella payroll, while others working with smaller clients retain the flexibility of operating outside.
The Numbers at Three Common Day Rates (2026/27)
All figures assume 228 billable days, £3,000 in annual company expenses, Employment Allowance applied, and a director salary of £12,570.
£400/day (£91,200 annual billing)
| Scenario | Net take-home | Effective tax rate | |---|---|---| | Outside IR35 (Ltd Co) | ~£59,800 | ~34% | | Inside IR35 (umbrella) | ~£47,200 | ~48% | | Permanent equivalent (PAYE) | ~£46,500 | ~49% |
Difference outside vs inside: ~£12,600/year
£500/day (£114,000 annual billing)
| Scenario | Net take-home | Effective tax rate | |---|---|---| | Outside IR35 (Ltd Co) | ~£73,000 | ~36% | | Inside IR35 (umbrella) | ~£57,500 | ~50% | | Permanent equivalent (PAYE) | ~£55,200 | ~52% |
Difference outside vs inside: ~£15,500/year
£650/day (£148,200 annual billing)
| Scenario | Net take-home | Effective tax rate | |---|---|---| | Outside IR35 (Ltd Co) | ~£90,500 | ~39% | | Inside IR35 (umbrella) | ~£71,800 | ~52% | | Permanent equivalent (PAYE) | ~£68,400 | ~54% |
Difference outside vs inside: ~£18,700/year
The gap widens at higher day rates because more income falls in the 33.75% dividend band versus the 40%+ PAYE rate.
Why Is Umbrella So Expensive?
The umbrella model absorbs employer NI before your deemed salary is even calculated. At £500/day, your gross annual billing is £114,000. The umbrella deducts employer NI (15% above £9,100) from that gross, so your deemed salary is approximately £97,500 — you have already lost over £16,000 before income tax and employee NI are applied. You are effectively paying both the employer and employee sides from the same pot.
What April 2026 Changed
The employer NI secondary threshold is £9,100 for 2026/27. Employer NI on salary or deemed salary above this threshold is charged at 15%. For outside IR35 contractors with Employment Allowance, this is almost fully offset (EA = £10,500). For umbrella workers, there is no offset — the full employer NI cost comes from your gross rate.
How to Assess Your Own IR35 Status
HMRC's Check Employment Status for Tax (CEST) tool is the starting point but not the final word. The three principal tests are:
- Personal service: Can you send a substitute to do the work?
- Mutuality of obligation: Is the engager obliged to offer work, and are you obliged to accept it?
- Control: Does the engager control how, when, and where you work?
An outside IR35 contract should have genuine substitution rights, no mutuality of obligation beyond the current engagement, and sufficient autonomy over how work is delivered.
Calculate Your Own Numbers
The AccLedger IR35 calculator lets you enter your specific day rate and see the three-way comparison in real time — updated for 2026/27 including the April changes.
If you are operating outside IR35 through a limited company, AccLedger handles your invoicing, bookkeeping, VAT, payroll, and CT600 — all connected directly to HMRC.