Contractor Calculator UK 2025 — IR35 Inside vs Outside
Enter your day rate and see exactly what you take home as a UK contractor in 2025/26. Compare outside IR35 via limited company against inside IR35 via umbrella, side by side. Includes corporation tax, employer NI, employee NI, income tax, and dividend calculations — all with 2025/26 rates.
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Contractor Tax UK 2025: IR35, Limited Company and Umbrella Guide
Contracting in the UK means navigating some of the most complex tax rules in the British tax system. Whether you are an IT contractor, consultant, engineer, or freelance professional, the single most important tax decision you will make is whether your work falls inside or outside IR35 — and which vehicle (limited company or umbrella) to use.
This guide explains the key concepts, 2025/26 tax rates, and the financial difference between your main options, with realistic worked examples for typical day rates.
Understanding IR35: The Basics
IR35 (formally known as the off-payroll working rules) is legislation designed to prevent "disguised employment." If you work through an intermediary (typically a personal service company or limited company) but would be considered an employee if engaged directly by the client, HMRC says you are inside IR35. The consequence is that your income is taxed as employment income, subject to full income tax and National Insurance.
The key tests HMRC uses to determine IR35 status include:
- Substitution: Can you send a substitute to do the work? A genuine contractor can; an employee cannot.
- Mutuality of obligation: Is the client obliged to offer work, and are you obliged to accept it? Employment-like obligations suggest inside IR35.
- Control: Does the client control how, where, and when you work? High control suggests inside IR35.
- Financial risk: Do you risk your own money if things go wrong? Self-employed people bear genuine financial risk; employees do not.
- Part and parcel of the organisation: Are you fully integrated into the client's team and operations?
Since April 2021, for medium and large private sector clients, the end client (not the contractor) determines IR35 status and must issue a Status Determination Statement. For small private sector clients, contractors can still self-assess their status.
Outside IR35 via Limited Company: How It Works
Operating through a limited company outside IR35 allows you to pay yourself in the most tax-efficient way. The typical approach is to draw a small director's salary — usually set at either the NI secondary threshold (£9,100 in 2025/26, meaning no employer or employee NI) or the personal allowance (£12,570, using up the tax-free allowance but triggering some employer NI) — and take the remainder of profits as dividends.
Dividends are taxed at lower rates than salary and are not subject to National Insurance. In 2025/26:
- Dividend allowance: £500 (tax-free)
- Basic rate dividends (up to £50,270 total income): 8.75%
- Higher rate dividends (£50,270 to £125,140): 33.75%
- Additional rate dividends (above £125,140): 39.35%
Corporation tax on company profits is 19% on profits up to £50,000 (small profits rate), rising to 25% on profits above £250,000 (main rate), with marginal relief between these thresholds. At typical contractor income levels below £100,000 per year, the effective corporation tax rate is often 19% to 21%.
Inside IR35 via Umbrella: How It Works
Working inside IR35 via an umbrella company means the umbrella becomes your employer. Your client pays the umbrella your agreed assignment rate. The umbrella deducts employer-side costs before calculating your pay:
- Employer NI: 13.8% on earnings above the secondary threshold (£9,100 per year)
- Apprenticeship levy: 0.5% of the assignment rate
- Umbrella company fee: typically £25 to £40 per week
What remains is your gross employment income, from which employee NI (8% on £12,570–£50,270, 2% above £50,270) and income tax (20% basic rate, 40% higher rate above £50,270, 45% additional rate above £125,140) are deducted through PAYE. The result is that you bear the cost of both employer and employee NI, making this structure significantly less tax-efficient than outside IR35 for most day rates.
Typical Effective Tax Rates by Day Rate (2025/26)
| Day Rate | Annual (46w, 5d) | Outside IR35 (Ltd) Take-Home | Inside IR35 (Umbrella) Take-Home | Annual Difference |
|---|---|---|---|---|
| £300/day | £69,000 | approx. £48,000 | approx. £39,000 | approx. £9,000 |
| £500/day | £115,000 | approx. £74,000 | approx. £59,000 | approx. £15,000 |
| £700/day | £161,000 | approx. £96,000 | approx. £80,000 | approx. £16,000 |
| £1,000/day | £230,000 | approx. £130,000 | approx. £113,000 | approx. £17,000 |
Note: Outside IR35 figures assume salary of £9,100, typical expenses of £300/month, and optimal dividend extraction. Actual figures depend on personal circumstances.
Choosing Between Limited Company and Umbrella
If you are outside IR35 and contracting for medium to long-term, a limited company is almost always more tax-efficient. The additional administration — annual accounts, corporation tax returns, payroll, Companies House filings — costs approximately £1,000 to £2,500 per year in accountancy fees, which is easily outweighed by the tax saving.
An umbrella company is the simpler choice when you are inside IR35, working on short contracts, between contracts frequently, new to contracting, or working for overseas clients. Umbrella companies handle all PAYE, NI, and payroll administration, and you get the employment rights that a limited company director typically does not have.
Frequently Asked Questions: Contractor Tax & IR35
What is the difference between inside and outside IR35?
Outside IR35 means your contract genuinely reflects a self-employed, business-to-business relationship — you have control over how you work, you can send a substitute, and you bear financial risk. You can operate through a limited company and pay yourself efficiently through salary and dividends. Inside IR35 means HMRC regards you as effectively an employee for tax purposes, and you must pay income tax and NI as if employed. Most contractors inside IR35 operate through an umbrella company, which handles PAYE on their behalf.
How much more do outside IR35 contractors take home compared to inside IR35?
The difference can be substantial. On a day rate of £500 (working 5 days a week, 46 weeks a year), an outside IR35 contractor through a limited company might take home approximately £72,000–£75,000 after all taxes. The same contractor inside IR35 via umbrella would take home approximately £57,000–£60,000. The difference of £13,000–£17,000 per year represents the tax efficiency of the outside IR35 limited company structure.
What are the tax rates for a limited company contractor outside IR35 in 2025/26?
A limited company contractor typically draws a salary up to the NI secondary threshold (£9,100) and takes the remainder as dividends. Corporation tax is 19% on profits up to £50,000 and 25% on profits above £250,000, with marginal relief between. Dividends are taxed at 8.75% (basic rate), 33.75% (higher rate) and 39.35% (additional rate) after the £500 dividend allowance. The combined effective tax rate is lower than PAYE because dividends are not subject to National Insurance.
How does umbrella company pay work for inside IR35 contractors?
Your client pays your assignment rate to the umbrella company. The umbrella deducts employer NI (13.8% on earnings above £9,100 per year), the apprenticeship levy (0.5%), and its own fee (typically £25–£40/week), then pays you a gross salary from which employee NI and income tax are deducted through PAYE. You effectively bear both employer and employee NI costs, significantly reducing your take-home compared to outside IR35.
What expenses can outside IR35 contractors claim through a limited company?
Allowable business expenses that reduce company taxable profit include: travel and subsistence to client sites (not ordinary commuting), professional subscriptions and training, equipment and technology, home office costs, marketing, accountancy fees, and employer pension contributions. These expenses make the outside IR35 limited company structure significantly more tax-efficient than inside IR35 working.
What is the personal service company (PSC) and IR35 process?
A personal service company (PSC) is typically a single-director limited company through which a contractor provides services. Since April 2021, for medium and large private sector clients, the responsibility for determining IR35 status shifted from the contractor to the end client. The client must issue a Status Determination Statement (SDS). If inside IR35, the fee-payer (often a recruitment agency) must deduct income tax and NI before paying the PSC. For small private sector clients, the contractor still self-assesses IR35 status.
Should I use a limited company or umbrella company as a contractor?
If outside IR35, a limited company saves £10,000–£20,000 per year or more versus umbrella, though administration costs around £1,000–£2,500 in accountancy fees. If inside IR35, a limited company offers little advantage, so umbrella is simpler. Umbrella is also preferable for short contracts, new contractors, or those between contracts frequently.