The day rate on an inside IR35 contract is not the money you take home. It is closer to the total cost of employing you, and a series of deductions sit between that headline figure and your bank account. Understanding the order in which those deductions happen, and which of them are funded from your rate rather than added by the client, is the difference between negotiating a rate that works and accepting one that quietly costs you thousands.
This guide works through the arithmetic for the 2026/27 tax year. It covers the exact deduction order under the off-payroll working rules, why employer National Insurance comes out of your rate, and two full worked examples at common day rates. For the broader picture of what an inside determination means, including the deemed payment in principle, the umbrella option and what you can still claim, see our pillar guide on being inside IR35. This page is about the numbers.
Why the headline day rate is misleading
An employee sees a salary, and the employer's costs of providing that salary stay hidden. An inside IR35 contractor sees the employer's costs first, because the assignment rate is, in substance, a budget that has to cover them. That is the single most important idea for reading any inside rate.
When a client or agency quotes an inside rate, they are usually quoting the amount that will be paid into the chain before the fee-payer operates payroll on it. From that amount the fee-payer funds the costs an employer normally bears: employer Class 1 National Insurance, the Apprenticeship Levy where it applies, and (if there is an intermediary such as an umbrella) a margin. Only after those costs are stripped out is your gross taxable pay set. Your gross pay is then taxed like any salary.
So the same number, say £500 a day, means something very different inside IR35 than it does outside. Outside IR35, that £500 flows into your limited company as company income, and you extract it through a planned mix of salary and dividends. Inside IR35, the £500 first has to absorb the employer's National Insurance and levy, and what remains is taxed as employment income with no efficient extraction left. Treating the two as equivalent, pound for pound, is the most common and most expensive mistake contractors make when they move between contracts.
The deduction order under Chapter 10
The off-payroll working rules in Chapter 10 of ITEPA 2003 apply where your end client is medium or large. In that case the end client determines your status, and the fee-payer, which is usually the agency closest to your company, operates the tax before paying your company. This is the regime that covers the great majority of inside engagements since the private-sector reform in April 2021. The order of operations is fixed.
- Start with the amount paid to the fee-payer. This is the assignment rate, multiplied by the days worked, that arrives at the fee-payer for your engagement.
- Deduct VAT and the direct cost of materials. The fee-payer takes off any VAT and the direct cost of materials before treating the rest as a deemed direct payment. For a typical labour-only contractor the materials figure is nil, so this step changes little.
- Fund the employer's costs from the rate. The fee-payer must pay employer Class 1 National Insurance at 15 percent on pay above the £5,000 secondary threshold (2026/27), plus the Apprenticeship Levy where it applies, on top of your pay. Because the rate is the budget for the whole engagement, these employer costs are in practice funded from it, which reduces the gross pay that can be set.
- Set your gross taxable pay. What remains after the employer costs is your gross taxable pay, treated as a deemed direct payment.
- Operate PAYE and employee National Insurance. The fee-payer deducts employee Class 1 NIC and income tax through PAYE, exactly as it would for an employee, and pays the net amount to your company.
Two features of Chapter 10 make the inside position harsher than many contractors expect. First, there is no 5 percent expenses allowance: the flat administrative allowance survives only under the older Chapter 8 rules (see below), and it was abolished for off-payroll engagements. Second, your home-to-client travel and subsistence are generally not deductible, because each separate engagement is treated as a separate employment, so the client site is a permanent workplace for that engagement. The practical effect is that almost nothing reduces the taxable pay before income tax and NIC bite. We cover the travel restriction in detail in our guide to travel expenses inside IR35.
Where Chapter 8 differs: the 5 percent allowance and the deemed payment
If your end client is small, or wholly overseas with no UK connection, Chapter 10 does not apply and your company stays responsible under the original IR35 rules in Chapter 8. The arithmetic changes shape, because your company, not a fee-payer, does the work, and it does it at the year end rather than payment by payment.
Under Chapter 8 your company computes a deemed employment payment through a set of steps. In outline, you take the total relevant engagement income for the year, then deduct in turn: a flat 5 percent of that income as an administrative expenses allowance; actual allowable employment-type expenses; employer pension contributions and certain other permitted deductions; and any salary already paid to you through PAYE during the year. The figure that remains is then grossed down for employer National Insurance, and the balance is treated as deemed salary, subject to PAYE and NIC through your company's payroll.
The 5 percent allowance is the clearest single difference between the two regimes: retained under Chapter 8, gone under Chapter 10. On a £99,000 engagement that 5 percent is worth almost £5,000 of income that escapes the deemed-payment computation, which is a real saving the off-payroll regime removes. The Chapter 8 calculation also lets you net off a salary you have genuinely paid yourself in-year before computing the deemed payment, so the order in which you draw income matters more here than it does under Chapter 10, where the fee-payer simply operates PAYE on the lot. To know which regime applies to a given engagement, you need to know whether your client is small, which our guide to the small-company exemption explains. For most contractors with medium or large clients, though, Chapter 10 and its harsher arithmetic is the live reality.
Employer National Insurance: funded from your rate, not your client's pocket
This deserves its own section because it is where most of the misunderstanding lives. The rules say the fee-payer pays employer Class 1 National Insurance at 15 percent on top of your deemed pay. Read literally, that sounds like a cost the client absorbs. In commercial reality it is almost always a cost you absorb, because the rate you were offered is the total the engager is willing to spend, and the employer NIC has to come out of it.
Think of it as a wedge between the assignment rate and your gross pay. On every pound of pay above the £5,000 secondary threshold, the fee-payer owes 15 percent in employer NIC. If the rate is fixed, that 15 percent reduces the gross pay that can be paid out of it. The Apprenticeship Levy adds a further small slice where the chain is large enough to be within its scope. A single-director company that holds outside-IR35 work would normally claim the Employment Allowance to offset employer NIC, but that allowance is not available to a company whose only employee is a single director, and in any case the fee-payer, not your company, is the employer for the inside engagement, so the offset does not help here.
The honest way to read an inside rate is therefore to ask what it leaves after the employer's costs are funded. A rate that has not been uplifted to reflect employer NIC is, in effect, an outside-IR35 rate with a 15 percent haircut taken before you even reach the tax. When you compare an inside offer with your outside work, or with an umbrella assignment, the employer NIC is the first thing to strip out. Our guide to the limited company versus umbrella decision walks through the same comparison from the structural side.
The tax that follows: income tax and employee NIC in 2026/27
Once your gross taxable pay is set, it is taxed like a salary on the rUK bands for 2026/27. There is nothing exotic here; the point is to see how much of the gross survives.
Income tax (rUK, 2026/27)
- Personal allowance £12,570, tapered by £1 for every £2 of income above £100,000 and gone at £125,140.
- Basic rate 20 percent on taxable income from £12,571 to £50,270.
- Higher rate 40 percent from £50,271 to £125,140.
- Additional rate 45 percent above £125,140.
These thresholds are frozen to April 2031, so as rates and inflation push pay up, more of an inside contractor's income falls into the higher and additional bands over time. That fiscal drag is a slow but real cost of staying inside on a rising rate.
Employee National Insurance (2026/27)
- 8 percent on pay between the primary threshold of £12,570 and the upper earnings limit of £50,270.
- 2 percent on pay above £50,270.
Because a full-time inside contractor's gross pay usually sits well above the upper earnings limit, most of the marginal income is taxed at 40 percent income tax plus 2 percent employee NIC, on pay that has already shed 15 percent to employer NIC. That stacking is why the gap between an inside rate and take-home is so much wider than the gap an ordinary employee sees, and far wider than an outside-IR35 contractor experiences on the same headline rate.
Worked example one: £450 a day inside IR35
The figures below illustrate the mechanics for the 2026/27 tax year. They are a simplified single-engagement model to show the deduction order; they assume the contractor has no other income, the full personal allowance is available, the assignment is the contractor's only work for the year, and materials and VAT effects are nil. Real take-home depends on your full circumstances, so treat this as the shape of the calculation rather than a quote for your situation.
Assume a rate of £450 a day across 220 billed days, giving an assignment value of £99,000 for the year reaching the fee-payer.
| Step | Amount (2026/27) |
|---|---|
| Assignment value reaching the fee-payer | £99,000 |
| Less employer Class 1 NIC at 15% on pay above the £5,000 secondary threshold (funded from the rate) | about £12,261 |
| Gross taxable pay (deemed direct payment) | about £86,739 |
| Less income tax (20% and 40% on the rUK bands) | about £22,128 |
| Less employee Class 1 NIC (8% to £50,270, then 2%) | about £3,745 |
| Net reaching the contractor for the year | about £60,866 |
The Apprenticeship Levy is set aside in this illustration; where the chain is within its scope it would slightly increase the employer-cost wedge and slightly reduce the gross. The headline tells the story: a £99,000 assignment value produces around £61,000 of take-home, an effective deduction of roughly 38 percent once the employer's NIC is funded from the rate and the pay is taxed as employment income. A meaningful chunk of that, the £12,261 employer NIC, never appears on a payslip, which is exactly why the headline rate flatters the position.
Worked example two: £600 a day inside IR35
Now raise the rate. At £600 a day across 220 billed days, the assignment value is £132,000, on the same simplifying assumptions.
| Step | Amount (2026/27) |
|---|---|
| Assignment value reaching the fee-payer | £132,000 |
| Less employer Class 1 NIC at 15% on pay above the £5,000 secondary threshold (funded from the rate) | about £16,565 |
| Gross taxable pay (deemed direct payment) | about £115,435 |
| Less income tax (20%, 40% and the personal-allowance taper above £100,000) | about £36,693 |
| Less employee Class 1 NIC (8% to £50,270, then 2%) | about £4,319 |
| Net reaching the contractor for the year | about £74,423 |
Two things change as the rate rises. First, more of the gross pay falls into the 40 percent band, and as gross pay passes £100,000 the personal allowance begins to taper away, adding an effective 60 percent marginal cost on the slice between £100,000 and £125,140. Second, the proportion lost to employee NIC falls, because the marginal rate above £50,270 is only 2 percent. The net effect is that take-home rises with the rate, but each extra pound is taxed harder, so the effective deduction climbs above 43 percent at this level. The higher the inside rate, the more the personal-allowance taper and the higher-rate band erode the gain.
If you want to run your own rate through the same logic, our guide on turning a day rate into take-home sets out the steps for both inside and outside positions.
The same rate, inside versus outside
The fairest way to feel the cost of an inside determination is to hold the rate constant and change only the status. Take the £450 a day, 220-day engagement from the first example, worth £99,000 of company or assignment income, and ask what it leaves in each case for 2026/27. The inside figures are the ones already worked above. The outside figures below are a simplified illustration on the same no-other-income assumptions, using a modest director's salary and the balance extracted as dividends after corporation tax; they are indicative, because the outside-IR35 take-home depends heavily on the salary and dividend choices and on corporation tax, which our pillar guides cover in full.
| Position | Employer NIC funded from the rate | Expense and allowance relief | How income is taxed | Indicative net for the year |
|---|---|---|---|---|
| Inside IR35 (Chapter 10) | Yes, 15% on pay above £5,000 | No 5% allowance; home-to-client travel not deductible | PAYE: income tax plus employee NIC, as a salary | about £61,000 |
| Outside IR35 | No (income enters the company) | Full temporary-workplace travel within the 24-month rule; normal company expenses | Corporation tax, then a planned salary and dividend mix | materially higher on the same headline rate |
The exact outside figure is not the point and is not ours to assert as a single number, because it turns on the salary and dividend split, the corporation tax marginal rate and the contractor's other income. The point is the direction and the size of the gap. The same £450 a day produces a noticeably larger take-home outside IR35, for three compounding reasons: there is no employer NIC wedge taken from the rate, the expense and travel relief survives, and the income is extracted through a more efficient route than a straight salary. Anyone treating an inside rate and an outside rate as equivalent is, in effect, ignoring all three.
This is why a sensible negotiation on an inside contract starts by asking for an uplift that restores at least the employer NIC. An uplift of roughly the employer-NIC percentage gets you back to the gross pay an unuplifted outside rate would have implied, though it still does not recover the lost expense relief or the extraction efficiency. Whether you can secure that uplift is a commercial question, not a tax one, but you cannot negotiate for it if you do not know it is there to ask for.
Reading your Key Information Document or fee-payer statement
Whether you work inside through an umbrella or through your own company under Chapter 10, you should be given a written breakdown before you start, and you should read it as a sequence, not a single number. An umbrella must provide a Key Information Document showing the assignment rate, the deductions and the expected take-home; a fee-payer paying your company should likewise make the deduction chain visible. The skill is in matching the document to the deduction order set out above.
- Find the assignment rate. This is the top line, the cost of the engagement. It is not your pay.
- Identify the employer costs funded from it. Look for employer National Insurance at 15 percent, the Apprenticeship Levy where shown, and, for an umbrella, the margin. These reduce the gross before any tax. If a document presents these as deductions from your salary rather than as costs funded from the rate, that is a presentation choice, not a different outcome; the money comes from the same pot either way.
- Check the gross taxable pay. This is what remains after the employer costs, and it is the figure your income tax and employee NIC are calculated on.
- Confirm the PAYE deductions. Income tax on the rUK bands and employee NIC at 8 percent and 2 percent should bring you to the net.
- Watch for figures that do not add up. A document that promises a take-home far higher than this arithmetic allows, often dressed up as an advance, a loan or an inflated expense, is a marker of a tax-avoidance scheme. The firm's position on those is an unequivocal do-not-use: HMRC pursues the worker for the tax, often years later with interest and penalties. Holiday pay must be paid to you, not quietly retained, and a compliant provider sets all of this out plainly.
If your document and the arithmetic in this guide diverge, that gap is worth a conversation before you sign. The deductions themselves are lawful and unavoidable on an inside engagement; what varies is whether they have been presented honestly and whether the rate has been uplifted to absorb them.
How part-year and mixed work change the figures
The worked examples assume a single inside engagement running for a full tax year with no other income. Real contracting rarely looks like that, and the departures all change the numbers in ways worth anticipating.
A part-year inside engagement, say six months inside followed by a gap or by outside work, uses less of the higher-rate band on the inside income, so the average tax rate on that income can be lower than the full-year examples imply. But the personal allowance is only £12,570 across the whole year however you earn it, so once your total income for the year is high, even a short inside stint is taxed at your marginal rate, not from the bottom of the bands.
A mix of inside and outside income in the same year stacks. Your outside income flows into your company and is extracted as salary and dividends; your inside income is taxed as deemed employment pay. The two share the same personal allowance and the same band thresholds, so the inside salary uses up basic-rate band that would otherwise have sheltered your dividends, and your dividends are then taxed higher up. This interaction is one of the harder things to model by hand, because moving income between the inside and outside sides shifts what falls into each band. It is also where a contractor with both kinds of work most often pays more than they need to, simply by not coordinating the two.
Finally, other income, from employment, a pension, savings or property, sits underneath your contracting income in the band order and pushes it up. If you already use part of your personal allowance and basic-rate band elsewhere, your inside take-home is lower than the standalone examples here, because more of the deemed pay falls into the higher and additional rates. The single most useful habit is to model your whole year together rather than each contract in isolation, which is exactly what coordinating an inside engagement with the rest of your position requires.
What you keep, and what you lose, compared with outside IR35
The arithmetic above is only half the comparison. The other half is what happens to the money once it reaches your company. Under Chapter 10 the net payment arrives having already been through PAYE and NIC, so it can usually be drawn by you without a second charge; your company tracks it to avoid double taxation. That sounds neutral, but it hides the real loss.
What you lose is the planning. Outside IR35, company income is extracted through a deliberate mix of a modest salary and dividends, using the dividend allowance and the dividend rates. Inside IR35 income cannot be turned into a tax-efficient salary and dividend split, because it has already been taxed as employment income before it reaches you. For completeness, the 2026/27 dividend rates that apply to any genuinely company-side profit you do extract are 10.75 percent (ordinary), 35.75 percent (upper) and 39.35 percent (additional), with a £500 dividend allowance; those rates rose from 8.75 percent and 33.75 percent on 6 April 2026. But on inside income there is little or no profit left to pay as a dividend, which is the heart of why an inside engagement undermines the limited-company model.
You also lose almost all expense relief. Outside, the temporary-workplace rules let you claim business travel within the 24-month limit, and mileage at 55p per mile for the first 10,000 business miles and 25p thereafter from 6 April 2026. Inside, the home-to-client travel that makes up most contractor mileage is not deductible, so that relief disappears. The employer pension contribution from your company remains the one genuinely large tax-efficient lever that survives, because it is not affected by the inside status of the engagement.
Inside on some contracts, outside on others
Many contractors are not wholly inside or wholly outside; they hold a mix. An inside determination applies to one engagement, decided by the end client through a Status Determination Statement made with reasonable care, and reflecting the real working practices. It is not a verdict on you or your company. If you believe a determination is wrong, the client-led disagreement process gives the client 45 days to respond, and our guide to the Status Determination Statement explains how that works.
Where you hold both inside and outside work, the structural question is whether to keep your limited company or run inside assignments through an umbrella. For a genuinely inside engagement an umbrella is often simpler and frequently more economic, because it removes the cost and admin of running a company on income you cannot extract efficiently. Keeping the company makes sense where the outside work, retained profits or pension contributions justify it. The right answer turns on your specific mix, not on a rule of thumb, which is why we model it rather than assert it. To understand what counts as a genuine outside engagement in the first place, see our guide to staying outside IR35.
Getting your inside IR35 numbers right
The take-home arithmetic on an inside contract is not complicated, but it is unforgiving, and the biggest mistakes happen before any tax is calculated, when an inside rate is compared with an outside rate as if they were the same money. They are not. The employer's National Insurance and levy come out of the rate, the 5 percent allowance and travel relief have gone under Chapter 10, and what is left is taxed as a salary with no efficient extraction behind it.
If you are weighing an inside offer, deciding whether to negotiate an uplift, or working out whether an umbrella beats your limited company on a particular engagement, our team reviews the specific numbers against your wider position. We help contractors model rate, status and structure together rather than in isolation, so you know what an inside rate really leaves before you sign. To talk through an IR35 status and take-home review for your own engagements, get in touch with the team.