When a contract is inside IR35, tax and National Insurance are deducted before you receive payment. Understanding exactly where your gross day rate goes helps you make informed decisions about which contracts to accept and what rate to negotiate.
The deemed employment payment
The fee-payer (usually the agency) calculates a deemed employment payment from your gross invoice. This calculation starts with your gross rate, deducts the employer's National Insurance and apprenticeship levy (which come off the top), and then applies income tax and employee NICs to the remainder.
Step-by-step breakdown at £500 per day
Starting with a gross day rate of £500 for a five-day week (annual equivalent of £115,000), the deductions work approximately as follows. Employer NI at 13.8 percent reduces the amount available by approximately £13,000. The apprenticeship levy at 0.5 percent takes a further £450. The remaining amount is then subject to employee NI at 8 percent (above the threshold) and income tax at 20 percent and 40 percent on amounts above the relevant thresholds. After all deductions, the net take-home is approximately £290–£310 per day.
The employer NI problem
The most contentious aspect of inside IR35 is employer National Insurance. Despite not being an employee, the employer NI cost is deducted from your gross rate. This cost (13.8 percent above the threshold) effectively reduces your available pay by a significant margin before any other deductions. This is why contractors seek higher gross rates for inside IR35 engagements to compensate for this additional burden.
Umbrella fees
If you work through an umbrella company, their weekly margin (typically £20–£30) is also deducted before the tax calculations. While small in absolute terms, this adds up to £1,000–£1,500 per year.
Comparing inside and outside IR35
At a £500 day rate, the difference between inside and outside IR35 take-home pay is typically £50–£80 per day, or £12,000–£20,000 per year. This gap is the primary reason contractors actively seek outside IR35 engagements and negotiate higher rates when accepting inside IR35 work.