An inside-IR35 contract is one where HMRC's assessment says you work like an employee, so your pay is taxed like an employee's. The day rate the client agrees stays the same, but the chain of PAYE income tax, employee National Insurance, employer National Insurance, the Apprenticeship Levy and (if you're on an umbrella) the umbrella's margin, all come off before the money reaches your bank account. The result is often 40% less than the headline rate.
The deductions, in order
The order matters because each one is a percentage of what's left after the previous ones. Starting from a £500 day rate billed through an umbrella company:
- Umbrella margin: the fee the umbrella takes for running your payroll, typically £15-£25 per week regardless of day rate.
- Employer National Insurance (13.8% above the secondary threshold): the umbrella passes the employer NI through to you, so your effective pay is after employer NI, not before.
- Apprenticeship Levy (0.5%): also passed through at umbrella rates.
- Employee National Insurance (8% between the primary threshold and the upper earnings limit, 2% above): deducted from your gross pay.
- PAYE income tax: 20% basic, 40% higher, 45% additional, with the £12,570 personal allowance tapering above £100,000.
A worked example: £500 day rate, 220 billable days
Say you're on a 12-month inside-IR35 contract at £500 per day and you expect to bill 220 days (allowing 25 days leave, 8 bank holidays and some sick/training allowance). The headline revenue is £110,000.
- Umbrella margin at £20/week × 44 weeks: £880 off the top.
- Employer NI + Apprenticeship Levy on the balance: around £12,100 passed through.
- That leaves roughly £97,000 of gross pay going through PAYE.
- Employee NI on £97,000: around £5,500.
- Income tax on £97,000: around £26,100 (basic + higher rate, personal allowance intact at this level).
- Net take-home: around £65,400, or about £297 per billable day.
The same contractor working outside IR35 through a limited company at the same day rate would typically take home around £83,000 after corporation tax and dividend tax — a gap of about £17,000 a year. That gap is the price of the IR35 reclassification.
Tip: Model your own rate and expected billable days in the UK IR35 Take-Home Calculator — it shows the same deductions step by step, in your own numbers.
What still works inside IR35
The usual limited-company tax levers (dividends, splitting income with a spouse, retaining profit) stop working inside IR35, but two reliefs still apply: pension contributions through salary sacrifice remain tax-deductible before PAYE and NI, and genuine business expenses that would be allowable for an employee (travel to a non-permanent workplace, professional subscriptions) are still deductible. A pension sacrifice is often the single highest-leverage move, because it saves you income tax at your marginal rate plus both employee and employer NI simultaneously.
Umbrella vs PAYE directly through the client
Some clients will put you on their own payroll under an inside-IR35 contract rather than requiring an umbrella. The deductions are nearly identical — PAYE and both NICs still apply — but you avoid the umbrella margin (a saving of around £1,000 a year) and the Apprenticeship Levy pass-through (another £550 or so on £110K). On the other hand you lose some flexibility: pension sacrifice may be limited to the client's scheme, and switching assignments means paperwork each time. On balance, direct PAYE is cheaper if the client offers it and you don't need the umbrella's flexibility.
Why clients are still offering inside-IR35 contracts
Since the 2021 off-payroll reform, medium and large private-sector clients carry the risk of an incorrect IR35 determination. Many default to inside-IR35 for contractor hires as a liability-management choice, independently of how the work actually looks. The rate they offer is often set to be competitive with outside-IR35 limited-company take-home at a lower day rate; expect roughly a 20-25% premium on an inside-IR35 rate for a role that would otherwise be outside IR35.
What might change in Autumn Budget 2026
The UK Autumn Budget on 28 October 2026 is the most likely window for changes to the personal allowance, higher-rate threshold or NIC thresholds, all of which directly affect inside-IR35 take-home. Freeze extensions have been floated. The IR35 off-payroll rules themselves are not expected to change this cycle, but any PAYE or NI threshold move will flow through to every inside-IR35 contractor's net day rate.
Questions people ask
- What does a £500 day rate inside IR35 pay take-home?
- Around £290-£310 per billable day in 2026-27, after PAYE income tax, both employee and employer National Insurance, the Apprenticeship Levy, and a typical umbrella margin. Pension sacrifice can increase that.
- What's the difference between inside and outside IR35 take-home?
- On a £500 day rate over 220 billable days, inside IR35 nets roughly £65,000 while outside IR35 (through a limited company with a modest salary and dividends) nets roughly £83,000 — a gap of about £17,000 a year.
- Who pays employer NI inside IR35?
- Legally the fee-payer (the umbrella or the client's payroll) pays employer NI, but in practice they deduct it from the day rate before paying you. The headline day rate is quoted gross of employer NI; your take-home is after it.
- Is pension contribution still worth it inside IR35?
- Yes — it's often the single highest-leverage tax move inside IR35. Pension sacrifice saves you income tax at your marginal rate plus both employee and employer NI on the sacrificed amount, which can be 48% or more combined for a higher-rate taxpayer.
- Does the Autumn Budget 2026 affect my inside-IR35 take-home?
- If the Chancellor adjusts income tax bands, the personal allowance, or NIC thresholds on 28 October 2026, your inside-IR35 take-home will change the following tax year. The IR35 rules themselves are unlikely to change this cycle.