IR35 explained for 2026: what inside and outside really mean, who decides your status, and a worked £500 a day comparison after the dividend rate rise.
IR35 has been law since 2000 and it is still the thing contractors most often get wrong about their own money. Partly because the name is unhelpful, partly because the rules moved in 2017 and again in 2021, and partly because the folklore about how much you lose inside IR35 has never quite matched the arithmetic.
This is the 2026 version: what the rules actually say, who makes the decision, and a fully worked £500 a day comparison using this year’s rates. The answer is less dramatic than you have probably been told, and the reason why is interesting.
IR35, properly the off-payroll working rules, makes sure a worker who provides services through their own intermediary pays broadly the same income tax and National Insurance as an employee would, in cases where they would have been an employee had they contracted with the client directly.
That is close to HMRC’s own wording, and every part of it matters. It is a test of the relationship, not of your invoice. The intermediary is usually a limited company, often called a personal service company, though it can be a partnership or another individual.
Crucially, the rules apply contract by contract. HMRC is explicit that a worker may have some contracts within the rules and some outside them, and that a contract can be written, verbal or implied. Being outside IR35 last year tells you nothing about this year.
Outside IR35 means the engagement is genuinely a business to business arrangement. Your company invoices, pays corporation tax on profit, and you decide how to extract the money as salary, dividends or pension contributions.
Inside IR35 means the engagement is treated as employment for tax. The deemed employer, usually the agency or the client, deducts income tax and employee National Insurance from the fees paid to your intermediary. Employer National Insurance and the Apprenticeship Levy, where it applies, are paid to HMRC by the deemed employer.
What inside IR35 does not give you is employment rights. You are taxed like an employee without becoming one, which is the part contractors find hardest to accept and the part that is not going to change.
Since April 2021 the answer depends on the client.
Company size is therefore the single most useful thing to establish about a new engagement. For financial years beginning on or after 6 April 2025, a corporate client counts as medium or large if it exceeds two or more of these: turnover above £15 million, balance sheet total above £7.5 million, more than 50 employees. Fall under that and the client is small, which puts the determination back in your hands.
Where the client decides, it must produce a status determination statement setting out the decision and the reasons behind it. If you have not been given one, ask. It is not optional.
HMRC’s CEST tool is the standard route to a determination. HMRC says CEST is the only tool whose determinations it will stand behind, provided the information used stays accurate and the answers follow HMRC guidance. That guarantee is conditional, and the conditions are doing a lot of work, but it is still the safest starting point.
One exclusion worth knowing: if you are employed by an umbrella company, the off-payroll rules are unlikely to apply to you at all. You are already being taxed as an employee.
Here is the comparison people actually want. The assumptions matter, so they are all stated.
A contractor bills £500 a day for 200 days, so the client’s total budget for the engagement is £100,000. England, 2026/27 rates. No other income, no business expenses, no pension contributions and no student loan. Outside IR35, the company pays a director’s salary of £12,570 and distributes the rest as dividends.
The first thing that happens is the part nobody mentions. Employer National Insurance at 15% comes out of the same £100,000, so the deemed employment payment is not £100,000. Working backwards from the budget, with the £5,000 secondary threshold, the deemed employment payment is £87,608.70 and employer National Insurance takes £12,391.30.
From the £87,608.70:
Take-home: £61,370.45, about £5,114 a month.
Salary of £12,570 uses the personal allowance exactly, so no income tax and no employee National Insurance. Employer National Insurance on that salary is 15% of the £7,570 above the secondary threshold, so £1,135.50.
Company profit is £100,000 less £12,570 salary less £1,135.50 employer National Insurance, so £86,294.50. That sits between the £50,000 and £250,000 limits, so corporation tax is the 25% main rate reduced by marginal relief: £21,573.63 less £2,455.58 gives £19,118.05, an effective rate of 22.2%.
That leaves £67,176.45 to distribute. On 2026/27 dividend rates, with £500 covered by the dividend allowance, £37,200 taxed at 10.75% and £29,476.45 taxed at 35.75%, dividend tax is £14,536.83.
Take-home: £12,570 salary plus £67,176.45 dividends less £14,536.83 tax, so £65,209.62, about £5,434 a month.
| Inside IR35 | Outside IR35 | |
|---|---|---|
| Client budget | £100,000 | £100,000 |
| Total tax and NI | £38,629.55 | £34,790.38 |
| Annual take-home | £61,370.45 | £65,209.62 |
| Monthly | £5,114 | £5,434 |
About £3,839 a year, or £320 a month. Real, but a long way from the halving that contractor folklore suggests. The reason is that employer National Insurance is paid either way, and a like-for-like comparison has to start from the client’s budget rather than from a headline day rate that means different things in the two cases.
Change the assumptions and the gap moves sharply. Employer pension contributions from the company are the biggest lever, because they dodge corporation tax and dividend tax together.
Dividend tax rates rose by two percentage points from 6 April 2026. The ordinary rate went from 8.75% to 10.75% and the upper rate from 33.75% to 35.75%. The additional rate stayed at 39.35%. The dividend allowance is still £500.
In the worked example above, the same company distributing the same £67,176.45 would have paid £13,203.30 of dividend tax under the old rates. It now pays £14,536.83. The change costs this contractor £1,333.53 a year, and it narrows the outside IR35 advantage by roughly a third.
The government’s stated reason is that dividend income does not carry National Insurance, so it has been taxed more lightly than earnings. Whatever you make of that, the direction of travel is clear and the limited company route is worth less each time it moves.
The student loan trap. Deemed employers do not deduct student or postgraduate loan repayments from off-payroll fees. HMRC updated its guidance on this in February 2026 to say so plainly. You must register for Self Assessment and pay them yourself, which means an inside IR35 contractor can be taxed at source all year and still owe HMRC a return and a bill.
Status is per contract. Two engagements running at once can sit on opposite sides. Keep the determinations separate and keep the paperwork.
Schemes that promise to fix it. HMRC publishes guidance on arrangements that claim to get around the rules and aimed at contractors and agency workers. If a take-home rate sounds better than the arithmetic above allows, the difference is risk, and the risk is yours.
If you are moving between inside and outside engagements and want to see what each one really leaves you each month, the NetPay app tracks variable contract income alongside PAYE and gives you the take-home figure rather than the day rate. Free to download.
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IR35, properly called the off-payroll working rules, makes sure a contractor working through their own company pays broadly the same income tax and National Insurance as an employee would, where the working relationship looks like employment. HMRC applies it contract by contract, so the same person can be inside on one engagement and outside on another.
In most cases the client decides and must issue a status determination statement explaining the reasoning. The exception is a small client outside the public sector, where your own intermediary makes the determination. A client counts as medium or large if it exceeds two or more of: turnover above £15 million, balance sheet total above £7.5 million, more than 50 employees.
On a £500 a day engagement with a £100,000 annual client budget in 2026/27, our worked example leaves about £61,370 inside IR35 against about £65,210 outside it. That is roughly £320 a month, and the gap is smaller than most contractors expect because employer National Insurance comes out of the same budget either way.
Yes. Dividend tax rates rose by two percentage points from 6 April 2026, to 10.75% at the ordinary rate and 35.75% at the upper rate. That reduces the advantage of the outside IR35 limited company route. In our worked example it costs the contractor about £1,334 a year.
Want to see your actual take-home pay?
NetPay UK works out your real net pay after tax, NI, pension and salary sacrifice, for hourly, shift and variable-income workers. Free to download.
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A note on financial advice: NetPay UK calculates take-home pay based on official HMRC tax rules. This article reflects rules in force at the time of publication (19 September 2026). Tax rules change. For complex situations, consult a qualified UK accountant or visit gov.uk/income-tax.
