Inside vs Outside IR35 Explained: What It Means for Your Pay (2026)

Inside vs outside IR35 in one paragraph each

Inside IR35: HMRC treats the engagement as disguised employment. Income tax and National Insurance are deducted at source, usually through an umbrella company or the fee-payer's payroll. Employer costs such as employer NI and the apprenticeship levy are often taken from the assignment rate.

Outside IR35: the engagement is a genuine business-to-business contract. Your limited company invoices the client, pays corporation tax on profit, and you draw a mix of salary and dividends. This is usually more tax-efficient, but it brings more admin and responsibility.

Who decides your status?

For medium and large private-sector clients and all public-sector bodies, the client decides status and must give you a Status Determination Statement (SDS) with its reasons. For small private-sector clients, your own company makes the assessment.

HMRC's Check Employment Status for Tax (CEST) tool is a common starting point, but the decision rests on the real working arrangement, not just the written contract.

The factors that matter most

• Control: who decides how, when and where the work is done.
• Substitution: whether you can genuinely send someone else to do the work.
• Mutuality of obligation: whether the client must offer work and you must accept it.
• Financial risk and being in business on your own account: multiple clients, your own equipment, and fixing mistakes at your own cost.

Umbrella vs limited company: the practical trade-off

An umbrella company employs you, runs PAYE, and pays holiday pay and pension, with little admin for you. A limited company gives more control and usually more take-home when you are genuinely outside IR35, but adds accounting fees, filings and director duties.

Always compare the net figure, not the day rate. An inside-IR35 role at a higher rate can still pay less than an outside role at a lower one, and sometimes the reverse is true.