IR35 in Plain English: Inside vs Outside, With Numbers

Outside wins by £3,643.08, mostly because dividends are taxed at 10.75% and 35.75% instead of income tax at 20% and 40% plus employee National Insurance. The gap is smaller on smaller contracts — on a £300 day rate (£66,000 a year) the outside route nets £49,278.55 against £44,222.62 inside, a gap of £5,055.93. And the gap narrowed in April 2026, when the basic dividend rate rose from 8.75% to 10.75% and the higher rate from 33.75% to 35.75%.

How the outside route works

Your company takes the contract income, pays you a salary at the personal allowance (£12,570 — no income tax, no employee NI, just £1,135.50 of employer NI on the slice above £5,000), pays corporation tax on the remaining profit (19% up to £50,000, 25% above £250,000, marginal relief between the two), and you take the rest as dividends. The first £500 of dividends is tax-free; above that, 10.75% in the basic-rate band, 35.75% in the higher-rate band, 39.35% above £125,140. On this contract the company profit is £96,294.50, corporation tax is £21,768.04, and the dividends are £74,526.46.

How the inside route works

Inside IR35, the contract value is treated as deemed employment income: employer National Insurance comes off first (15% above £5,000, so £13,695.65 here), leaving a deemed gross of £96,304.35, and then income tax and employee National Insurance come off that exactly as on a normal payslip. There is no dividend route, no corporation tax, and no 5% expenses allowance — that was abolished in 2021, though older articles still mention it. In practice most inside-IR35 contractors are paid through an umbrella company, and the numbers match the umbrella company calculator almost exactly: the same waterfall, the same gross, the same net.

CEST, status reviews, and who decides

For medium and large clients, the client — not you, not your company — must decide your IR35 status and give you a Status Determination Statement explaining why. If you disagree, you have a right to challenge it, and the client must respond within 45 days. For small clients, the old rules still apply: your own company decides. Either way, the decision should be based on the reality of the working arrangement, and HMRC's CEST tool (Check Employment Status for Tax) is the free starting point: it asks about control, substitution and mutuality of obligation, and gives an answer HMRC says it will stand behind — provided the answers were accurate and the working practices match.

CEST has limits, and it is honest about them. It cannot decide genuinely borderline cases, and it gives no answer at all on mutuality of obligation in some versions — the question it skips is often the one that matters most. That is why a specialist status review is worth the money on a long contract: a written opinion from someone who has read your contract and interviewed you about how you actually work is defensible in a way a CEST printout is not. Keep the review, the contract, and evidence of how you worked — substitution offers, control over hours, your own equipment — together. If HMRC ever asks, that file is your case.

If HMRC opens an enquiry

An IR35 enquiry usually starts with a letter, not a visit: HMRC asks for the contract, the working practices, and evidence of how the engagement actually ran. The first thing to know is that the enquiry is about the facts, not the paperwork — HMRC will ask who told you what to do, who decided your hours, whether you could send a substitute, and whether you were integrated into the client's team. The contract matters, but only as evidence of what was agreed; if the reality was different, the reality wins. That is why the strongest defence is contemporaneous evidence: emails showing you set your own hours, invoices showing you billed for deliverables rather than time, proof that you worked for other clients, a substitution you actually used. Evidence created after the enquiry starts is worth far less than evidence created while the work was happening.

The second thing to know is that the liability sits with the fee-payer, not with you, when you work through an umbrella or a client payroll — but if you work through your own limited company, the company is liable, and the company's money is your money. Tax investigation insurance, usually £200–£400 a year, covers the cost of defending an enquiry, and for most contractors it pays for itself the first time a letter arrives. And if the enquiry goes against you, the bill is the tax and NI that should have been paid, plus interest, and potentially a penalty — but penalties are reduced or removed entirely if you took reasonable care, which means a CEST result you relied on in good faith, a status determination you followed, and professional advice you can show. The worst position is not being inside IR35; it is being inside IR35 with no paper trail at all.

What decides your status — and what does not

Status depends on the facts of how you actually work, not on what your contract says and not on what you call yourself. The three questions that matter most are control (does the client tell you how, when and where to work?), substitution (can you send someone else to do the job?), and mutuality of obligation (must the client offer work, and must you accept it?). Working practices outweigh paperwork: a contract that says "substitution allowed" means nothing if you have never substituted anyone and the client would refuse. What does not decide status: having a limited company, having multiple clients, or using an umbrella. And no calculator — including ours — can determine your status. This is an estimate from headline figures. IR35 status is fact-specific and this tool does not determine your status.

If your status is unclear, get a proper review: HMRC's CEST tool gives an indication, a specialist review gives a defensible opinion, and your client's own status determination (which they must give you for medium and large clients) is the one that legally counts. Do not choose a contract because the outside-IR35 numbers look better — choose the working arrangement that is real, and let the numbers follow.

The one thing to remember about IR35 is that the status question and the money question are the same question. Being inside costs roughly £3,643 a year on a £110,000 contract — not because the tax rate is higher, but because the whole structure changes: no corporation tax, no dividends, no expenses, just payroll. That is the price of the outside route's flexibility, and it is worth paying only if the flexibility is real: multiple clients, control over how the work is done, genuine substitution, and the risk that comes with running a business. If the reality is a single client, set hours, and a manager who tells you what to do, the outside structure is not saving you money — it is deferring a bill. Run the numbers in the IR35 calculator, read the determination, and if the answer is inside, take it: the inside route is not a punishment, it is the price of the job as it actually is.

Figures from the 2026/27 rates, last checked against GOV.UK on 5 November 2026. See all the rates on UK tax rates 2026/27. Next in this series: What your job really costs your employer.