Contractor Tax Accountants guide
Outside vs inside IR35: take-home guide 2026/27
What the outside vs inside IR35 take-home difference actually means, what drives it, and the legal question that must come first.
Tax year: 2026/27. Last reviewed: 2026-07-06.
Outside vs inside IR35 model (Excel)What the model shows
The outside vs inside IR35 model compares your net take-home from the same gross day rate under two scenarios: working through your own limited company (outside IR35) and being paid via an umbrella company (inside IR35). The gap between the two figures is what IR35 status is worth to you financially, on your specific rate.
For a GBP500 a day contractor working 240 days (GBP120,000 assignment income), the 2026/27 difference is typically around GBP1,900 to GBP2,000 per year. At a higher rate the absolute gap widens; as a percentage of take-home it remains broadly similar.
What drives the difference
The outside (limited company) route converts your assignment income into salary, employer NIC, expenses and dividends. Corporation tax applies to the profit; you draw dividends and pay dividend tax at 10.75% (basic rate), 35.75% (higher rate) or 39.35% (additional rate) from 6 April 2026. The inside (umbrella) route treats the same income as employment: employer NIC (15% above GBP5,000 from April 2025), the apprenticeship levy (0.5%) and the umbrella margin come out before your gross salary is derived, then standard PAYE income tax and employee NIC apply.
The main reasons the outside route often retains more are: lower effective tax on dividend income in the basic band (10.75% versus up to 40% income tax); corporation tax at 19% (below GBP50,000 profit) or marginal relief rate between GBP50,000 and GBP250,000 rather than a straight income tax slice; and the ability to claim genuine business expenses. Against that, employer NIC on the director's salary and corporation tax both reduce the pot.
Legal position comes first
The take-home advantage of the outside route is not a reason to declare outside IR35 if the engagement does not genuinely meet the test. IR35 status is determined by the whole-picture case-law test, not by what the contract says and not by the financial outcome this model shows.
The relevant case law (Ready Mixed Concrete v Minister of Pensions 1968, Atholl House Productions v HMRC 2022, Kickabout Productions v HMRC 2022, PGMOL v HMRC 2023) identifies three central indicators: control (how, when and where you work), personal service and substitution (can a genuine substitute deliver the work), and mutuality of obligation (is there an obligation to offer work, and to accept it). Working practices matter more than contract wording.
CEST and HMRC determinations
HMRC's Check Employment Status for Tax (CEST) tool is a useful first screen and produces an audit document. HMRC stands behind an accurate CEST result, meaning it will not challenge a status position that was based on an accurate and complete CEST. However, CEST does not bind an employment tribunal or court, and its treatment of mutuality of obligation has been narrower than the case law in some decisions. A CEST "outside" result is not a guarantee of success in every dispute.
Chapter 10 (off-payroll working)
For engagements in the public sector (from April 2017) or with medium and large private sector clients (from April 2021), it is the fee-payer (typically the agency or end client) that determines your status and operates PAYE on the deemed payment if the determination is inside. Under these rules there is no 5% allowance for expenses (removed from April 2017 for public sector, April 2021 for private sector). If you disagree with a Status Determination Statement (SDS), you can challenge it through the client-led disagreement process.
How the umbrella deductions work
In the umbrella model, the assignment rate (what the end client pays) is allocated in order: the umbrella margin (typically GBP1,000 to GBP2,000 a year) comes off first, then employer NIC at 15% above the GBP5,000 secondary threshold and the apprenticeship levy at 0.5% are funded from the remaining pot. The formula that solves the circularity is:
gross salary = (pot + employer NIC rate x employer NIC threshold) / (1 + employer NIC rate + levy rate)
Your PAYE income tax and employee NIC (8% between GBP12,570 and GBP50,270, 2% above) then apply to that gross salary.
April 2026 rate changes
From 6 April 2026: dividend tax rates rise to 10.75% (basic), 35.75% (higher) and 39.35% (additional) under the Finance Act 2026 section 4. The GBP500 dividend allowance remains. Employer NIC at 15% above GBP5,000 took effect from April 2025. Corporation tax rates are unchanged from FY2025.
Using the model
Enter your day rate, billable days, director salary (typically at the personal allowance of GBP12,570 for a single-director PSC), allowable expenses and umbrella margin. The model derives turnover, employer NIC, profit, corporation tax, dividends, dividend tax and net take-home for both routes, then shows the gap. The rates tab locks the 2026/27 constants so you can update the model when rates change.
The model is a directional tool. Your actual position depends on your specific expenses, the salary level you choose, whether you have associated companies (which reduce the GBP50,000 and GBP250,000 CT limits), and the full income tax position including any other income. A specialist can confirm the numbers for your situation.
See your take-home pay outside IR35
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