IR35 and contractor
tax: the complete
guide
IR35 determines whether a contract is taxed broadly like employment (inside IR35) or like genuine self-employment (outside IR35), which significantly affects both take-home pay and what expenses you can claim. Outside IR35 generally keeps more of your day rate and more claimable expenses, but the determination depends on the actual working relationship, not just how the contract is worded.
For contractors operating through a limited company, IR35 status is the single biggest factor affecting take-home pay, claimable expenses, and how you should structure your work. This guide covers the core decision and the practical consequences.
What IR35 actually determines
IR35 decides whether HMRC treats your contract as disguised employment, inside IR35, or as genuine self-employment through your company, outside IR35. The determination depends on factors like control, substitution rights and mutuality of obligation, not simply what the contract says on paper. See our full IR35 explainer.
The take-home pay difference
The gap between inside and outside IR35 on an identical day rate can be substantial, inside IR35 income is taxed broadly like employment, with no Employer's NI deducted by the fee-payer factored into your rate in practice. See our worked day-rate comparison for the real numbers side by side.
Umbrella company or your own limited company?
If a contract is inside IR35, you don't have to use an umbrella company, you can still operate through your own limited company, though the tax treatment of that income changes. See our umbrella vs limited company comparison for which actually pays more in your situation.
What you can claim either way
Expense rules shift significantly depending on your IR35 status, outside IR35 contractors keep access to normal business expense rules, including travel, while inside IR35 loses several categories, including home-to-client travel, which is treated like an employee's commute. See our contractor expenses guide for the full breakdown.
In this guide
What is IR35?
How it affects your contractor take-home pay.
Inside vs outside IR35: a day-rate comparison
Same day rate, very different take-home pay, worked example.
Umbrella company vs limited company
Which pays more? The honest comparison.
Contractor allowable expenses
What you can and can't claim, inside and outside IR35.
Frequently asked questions
What does IR35 actually determine?
IR35 determines whether a contractor's engagement is taxed broadly like employment (inside IR35) or like genuine self-employment (outside IR35), based on the real working relationship rather than just the contract wording.
Does being inside IR35 mean I have to use an umbrella company?
No, you can still operate through your own limited company while inside IR35, though the tax treatment of the income differs from an outside-IR35 engagement.
Can I claim travel expenses as a contractor?
Outside IR35, reasonable travel to client sites is usually claimable. Inside IR35, home-to-work travel is generally disallowed in the same way as an employee's commute.
How much difference does IR35 status make to take-home pay?
It can be substantial on an identical day rate, since inside IR35 income is taxed broadly like employment with no equivalent reduction for the costs an outside-IR35 contractor can offset.
Get clarity on your IR35 status and take-home pay
Book a free consultation and we'll go through your specific contract.