The IR35 take-home gap is the single most consequential number in any UK limited company contractor's working life, and the figure most often misrepresented by the day-rate calculators that flood Google. A typical online calculator quotes a 10 to 15 percent difference between inside and outside IR35 net take-home. The true gap, modelled honestly with corporation tax, salary, dividends, pension contributions, and the fee-payer's employer's NI apportionment, sits between 25 and 35 percent for most realistic day rates.
This piece walks the maths for a £500/day and a £1,000/day contractor in 2026, isolates the variables that most calculators omit, and explains why the inside-vs-outside conversation should never be framed as a pay-cut percentage in isolation. Sister pieces in [the IR35 hub](/guide/ir35-off-payroll-guide/) cover the [Status Determination Statement appeal route](/blog/status-determination-statement-appeal/) and [substitution and Mutuality of Obligation](/blog/mutuality-of-obligation-substitution/).
Outside IR35: the standard contractor economics
A limited company contractor outside IR35 invoices the client at the gross day rate plus VAT. The Ltd company pays a small director salary at the personal allowance, leaves the bulk of profit on the books, pays corporation tax at 19 to 25 percent depending on profits, and the director extracts post-tax profit as dividends. A further chunk goes into pension via employer contributions, which are corporation-tax-deductible.
On a £500/day contract worked 220 days per year, gross revenue is £110,000. Director salary at £12,570 reduces profits to roughly £97,430 (minus accountancy, insurance, allowable expenses). Corporation tax at the marginal 23.5% rate (the £50k to £250k tapered band) is roughly £21,000, leaving £74,000 of post-tax profit. After a £40,000 employer pension contribution and reasonable dividends to a single director, net personal take-home lands in the £58,000 to £65,000 range, with another £40,000 inside the pension wrapper.
Inside IR35: PAYE deduction at source
A contractor working inside IR35 in the public or medium/large private sector has PAYE and employee NI deducted at source by the fee-payer (the agency or end-client). The fee-payer also bears employer's NI at 15% from April 2025, plus the Apprenticeship Levy if applicable. In practice, contractors negotiating an inside-IR35 day rate find the fee-payer reduces the gross rate to absorb the employer NI cost, so the contractor sees a lower headline day rate before any personal tax is taken.
On the same £500/day at 220 days, gross is £110,000. If the fee-payer reduces the rate by 13% to absorb employer NI, the contractor sees £95,700 gross. PAYE and employee NI on that sum, with no pension salary sacrifice, give net take-home around £62,000 to £64,000. Pension contributions are possible via salary sacrifice if the fee-payer permits it, but most umbrellas charge a margin on the salary-sacrificed amount.
Worked example: £500/day comparison
| Component | Outside IR35 (Ltd) | Inside IR35 (fee-payer PAYE) |
|---|---|---|
| Gross day rate × 220 days | £110,000 | £110,000 nominal |
| Employer NI absorbed | n/a | −£14,300 (rate cut) |
| Effective gross to contractor | £110,000 | £95,700 |
| Tax / CT | ~£21,000 CT + ~£4,000 personal | ~£25,500 PAYE + NI |
| Pension (employer/SS) | £40,000 | £0 to £15,000 (umbrella permitting) |
| Net cash to contractor | ~£60,000 | ~£62,000 |
| Pension wrapper | £40,000 | £0 to £15,000 |
| Total wealth created | ~£100,000 | ~£62,000 to £77,000 |
The headline net cash figures look similar. The wealth-creation figure does not. The outside-IR35 contractor moves roughly £100,000 of pre-tax revenue into a combination of personal cash and pension wrapper. The inside-IR35 contractor moves £62,000 to £77,000 depending on umbrella pension flexibility. The gap is £25,000 to £40,000 of annual wealth, compounded over a contracting career.
Worked example: £1,000/day comparison
At £1,000/day, 220 days, gross is £220,000. Outside IR35, the contractor pays 25% corporation tax (above the £250k tapered band), leaves a significant employer pension contribution, and extracts dividends. Net cash plus pension lands around £170,000 to £180,000 of total wealth creation per year. Inside IR35, after the fee-payer's NI cut and personal PAYE plus the additional rate band kicking in at £125,140, total wealth creation is around £115,000 to £125,000.
The percentage gap grows at higher day rates because the dividend-and-pension extraction route benefits disproportionately from corporation tax efficiency, while PAYE rates climb into the additional-rate band. At £1,000/day, the gap is closer to 35 percent of total wealth created, not 10 to 15 percent.
What most calculators omit
- The fee-payer's employer NI is almost always absorbed by reducing the gross rate, but headline calculators show the unreduced rate.
- Employer pension contributions via Ltd company are corporation-tax-deductible and bypass personal tax thresholds, hugely under-modelled in PAYE comparisons.
- The Apprenticeship Levy adds 0.5% to fee-payer costs for large employers, often passed back.
- Tax-free expense rules (travel, subsistence, professional subscriptions) are restricted inside IR35 under the [Section 339A travel rule](/guide/uk-contractor-allowable-expenses/).
- Holiday pay roll-up via umbrella companies is often quoted as a benefit but is funded from the contractor's own gross rate.
- Corporation tax marginal rates between £50k and £250k profit (the 26.5% effective marginal rate) materially affect Ltd take-home in the £400 to £700/day range.
Can I be inside IR35 on one contract and outside on another?
Yes. IR35 status is determined contract-by-contract, based on the actual working practices for each engagement. A contractor can run a Ltd company carrying one inside-IR35 contract (with PAYE deducted by the fee-payer) and a separate outside-IR35 contract (where the contractor invoices gross and manages tax through the Ltd) simultaneously. This mixed position is increasingly common and the Ltd company structure is well-suited to managing it cleanly. The contractor's [contract review specialist](/services/ir35-compliance/) should assess each engagement independently.
If I am inside IR35, can I still claim any expenses?
Most travel and subsistence is restricted inside IR35 under Section 339A ITEPA 2003 because the workplace is treated as permanent for tax purposes. The exception is genuine multi-site work where no single workplace is treated as permanent. Direct expenses incurred wholly and exclusively in the performance of the deemed employment, such as professional subscriptions to qualifying bodies under Section 344 ITEPA 2003, remain claimable. Use-of-home costs are not generally allowable under deemed employment.
Is going umbrella better than inside IR35 via my Ltd?
Operating inside IR35 through a Ltd company is administratively more complex than going umbrella for the same contract because the Ltd must still file annual accounts, corporation tax returns, and confirmation statements while the contractor sees no income through it. Most contractors with a single inside-IR35 contract and no foreseeable outside-IR35 work close the Ltd and run through a compliant umbrella. Contractors with a mixed inside/outside book of work, or with retained earnings in the Ltd they want to extract over multiple tax years, keep the Ltd open. See [the Ltd vs umbrella strategic comparison](/guide/limited-company-vs-umbrella-strategic-choice/) for the full decision framework.
Continue the series
The Definitive Guide to IR35 and Off-Payroll Working RulesRead the complete guide and the rest of the series.