IR35 is the single biggest factor affecting how much money UK contractors take home. If you're contracting or thinking about it, you need to understand this.
What Is IR35?
IR35 is tax legislation designed to catch "disguised employees" — people who work like employees but operate through their own limited company to pay less tax. If HMRC decides you're inside IR35, you pay roughly the same tax as an employee, eliminating most of the tax benefits of contracting.
Inside vs Outside: The Money Difference
The tax difference is significant. On a £500/day rate:
| Inside IR35 | Outside IR35 | |
|---|---|---|
| Annual billing (220 days) | £110,000 | £110,000 |
| Take home (approx) | £68,000 | £82,000 |
| Effective tax rate | 38% | 25% |
That's roughly £14,000/year difference. Use our IR35 calculator to see the exact figures for your rate.
Who Decides Your IR35 Status?
Since April 2021, for medium and large private sector clients, the end client determines your IR35 status (not you). They issue a Status Determination Statement (SDS). For small private sector clients, you still determine your own status.
Key Factors That Determine Status
Substitution: Can you send someone else to do the work? If yes, that points to outside IR35.
Control: Does the client dictate how, when, and where you work? Employee-like control suggests inside IR35.
Mutuality of obligation: Is the client obligated to offer you work, and are you obligated to accept it? If yes, that's more like employment.
Inside IR35? Your Options
If you're determined inside IR35, you can work through an umbrella company (simplest), stay with your limited company but operate deemed employment rules, negotiate a higher day rate to offset the tax hit (typically 15-20% more), or find a different contract that's outside IR35.
Compare inside vs outside IR35 take home
IR35 calculator →