Question 1

What does inside IR35 mean for contractors?

Accepted Answer

Inside IR35 means HMRC (or your end client) has decided your working relationship looks more like employment than a genuine business-to-business contract. When inside IR35, the full contract value is treated as employment income and taxed via PAYE with employee and employer National Insurance deducted before you see any money. Most inside IR35 contractors work through an umbrella company, which adds a weekly fee (typically £20 to £30) and handles PAYE administration. The practical result is roughly 30% to 40% less take-home than the equivalent outside IR35 rate, because you lose the ability to pay yourself in tax-efficient dividends and claim limited company expenses.

Question 2

How does outside IR35 save money?

Accepted Answer

Outside IR35 means HMRC accepts you are running a genuine independent business through your own limited company. Your company invoices the client for the full fee, deducts legitimate business expenses, pays corporation tax (19% on the first £50,000 of profit, rising toward 25%), then distributes the remaining profit as dividends. Dividends are taxed at 8.75% in the basic rate band, 33.75% in the higher band, and 39.35% in the additional band — but crucially, no employee or employer National Insurance is payable on dividend income. Combined with a small tax-free director salary, this typically saves £8,000 to £15,000 per year versus an equivalent inside IR35 rate.

Question 3

What are the 2025/26 UK tax rates used in this calculator?

Accepted Answer

The calculator uses these 2025/26 HMRC figures: personal allowance £12,570 (tapers above £100,000); basic rate 20% to £50,270; higher rate 40% to £125,140; additional rate 45% above £125,140. Employer NI is 15% above the £5,000 secondary threshold (raised from 13.8% in April 2025). Employee NI is 8% between £12,570 and £50,270, then 2% above. Dividend allowance is £500. Dividend tax is 8.75% / 33.75% / 39.35%. Corporation tax is 19% on profits up to £50,000, tapering via marginal relief to 25% above £250,000. Rates apply to England, Wales, and Northern Ireland — Scottish income tax bands differ.

Question 4

Should I take a director salary or only dividends?

Accepted Answer

For most one-person limited companies operating outside IR35, a director salary of £12,570 (the personal allowance) is the most tax-efficient. You pay no income tax on it (it is within the PA), it counts toward your State Pension record, and it reduces company profit pre-corporation-tax by £12,570. The employer NI charge on a £12,570 salary above the £5,000 secondary threshold is £1,135, but the corporation tax saving is £2,388 at 19% — a net gain of £1,253. The calculator defaults to this but lets you choose £9,100 (the secondary NI threshold, avoiding employer NI entirely) or £0 (dividends only, simpler but loses NI credit for State Pension).

Question 5

What is the umbrella company fee and why does it reduce my take-home?

Accepted Answer

Umbrella companies are PAYE employment agencies that sit between you and the end client on inside IR35 contracts. They become your legal employer, deduct PAYE income tax and employee National Insurance, and also deduct employer NI (15% from April 2025) plus the Apprenticeship Levy (0.5%) from your gross rate before calculating your taxable pay. On top of these statutory deductions, umbrellas charge an administration fee, typically £20 to £30 per week (£1,040 to £1,560 per year). The fee is usually the smaller deduction — it is the employer NI that takes the biggest bite out of your gross rate.

Question 6

Can I contract outside IR35 if I only have one client?

Accepted Answer

Having a single client does not automatically make you inside IR35, but it does weaken your outside IR35 position because it suggests economic dependency on that client. HMRC looks at the full picture using tests around control, substitution, mutuality of obligation, financial risk, equipment, and integration. Genuine outside IR35 contractors typically have a right of substitution in their contract, supply their own equipment, take financial risk (e.g., fixed-price work), correct defects at their own cost, and are not integrated into the client''s organisational structure. Use HMRC''s CEST tool and consider a professional contract review before accepting any outside IR35 determination.

IR35 Calculator (Inside vs Outside)

How the IR35 Calculator Works

Inside IR35: What Happens to Your Money

Outside IR35: Using Your Own Limited Company

Day Rate Uplift for Inside IR35 Contracts