Part of our complete guide to IR35 & contractor tax.
Same rate, different take-home
If you've read our guide on what IR35 is and how it's decided, the next natural question is: how much does it actually cost in cash terms? Two contractors on the identical day rate, one inside IR35, one outside, can end up with meaningfully different take-home pay once tax and National Insurance are applied.
Why the gap exists
- Outside IR35, you operate through your limited company as normal: a modest salary plus dividends, with Corporation Tax on company profit and dividend tax on what you draw personally, see our guide on paying yourself tax-efficiently
- Inside IR35, the engagement is taxed broadly as if you were an employee of the client (or the fee-payer, often the agency), income tax and employee National Insurance are deducted in a PAYE-like way, and you lose access to the dividend route entirely for that income
Key point: This isn't a difference in the headline day rate, it's a difference in what happens to that rate after tax. Two contracts at the same day rate are not the same deal once you look at what actually lands in your pocket.
Run your own numbers
The exact gap depends on your day rate, the number of days worked, and your other income. Rather than relying on a single generic example, use our day-rate calculator to compare inside vs outside IR35 take-home pay for your actual rate and working pattern.
What this means when negotiating a contract
Some clients offer a modestly higher day rate for inside-IR35 roles, acknowledging the tax difference, but it rarely fully closes the gap. Knowing the real size of the difference, rather than guessing, puts you in a stronger position when negotiating rate or deciding between two offers with different IR35 statuses.
Weighing up an inside vs outside offer? Book a free consultation and we'll run the real numbers for your specific situation before you decide.
Frequently asked questions
Is the day rate itself usually different inside vs outside IR35?
Sometimes clients offer a higher headline day rate for inside-IR35 roles to partially compensate for the tax difference, but it rarely fully closes the gap in take-home pay.
Why does the gap exist if the day rate is the same?
Inside IR35, tax and National Insurance are deducted in a way that mirrors employment, with no access to the dividend route. Outside IR35, the usual limited company structure, salary plus dividends, remains available.
Can I just negotiate a higher rate to compensate?
You can try, and some contractors do build a premium into inside-IR35 rate negotiations, but it's worth knowing the actual size of the gap first so you're negotiating from real numbers, not a guess.
Does this comparison change based on how much I earn?
Yes, the percentage gap tends to widen at higher day rates, since outside-IR35 dividend tax rates stay comparatively favourable while inside-IR35 employment-style deductions scale up with income.