The terms "inside IR35" and "outside IR35" describe how your contract is classified for tax purposes. This single distinction has a direct and substantial impact on your take-home pay, your rights, and how you operate as a contractor.
Outside IR35
When a contract is deemed outside IR35, you are recognised as a genuinely self-employed contractor operating through your limited company. You can pay yourself a modest salary (typically around the NI threshold) and take the rest of your income as dividends, which are taxed at lower rates than employment income. You also claim legitimate business expenses against your revenue, further reducing your tax liability.
A contractor earning a day rate of £500 outside IR35 might take home around £350–£380 per day after all taxes, depending on their expenses and dividend strategy.
Inside IR35
When a contract falls inside IR35, tax and National Insurance contributions are deducted at source before you receive payment. The fee-payer (usually the agency or end client) calculates a deemed employment payment and deducts income tax, employee NICs, and employer NICs from your gross pay. The result is a take-home figure closer to what a permanent employee on the same salary would receive.
That same £500 per day inside IR35 might net you around £280–£300 per day, a difference of £50–£80 daily or £12,000–£20,000 annually.
Your rights under each status
An important distinction: being inside IR35 does not make you an employee. You still do not receive holiday pay, sick pay, pension contributions, or any other statutory employment benefits. You pay employment-level taxes without receiving employment-level protections. This is why many contractors actively seek outside IR35 roles, as the tax treatment is fairer relative to the risks and lack of benefits.
How status is determined
The status depends on the actual working practices of the engagement, not just what the contract says. Key factors include the right of substitution, control over how work is performed, and mutuality of obligation. We cover these tests in detail in our guide to IR35 status tests.