What Is IR35? The UK Contractor Tax Trap in 2026
The same day rate can pay a UK contractor £20k more a year, depending on one HMRC label. Get it wrong and the back-tax bill is retrospective. Most contractors get it wrong.
Inside vs outside IR35 on £115k revenue
| Item | Outside IR35 | Inside IR35 |
|---|---|---|
| Director salary | £12,570 | n/a |
| Corporation tax | ~£19,400 | None |
| Dividends paid | ~£82,000 | None |
| Income tax + NI | ~£15,000 | ~£33,700 |
| Take-home | ~£79,000 | ~£67,500 |
On £500/day, 46 weeks. Outside IR35 nets roughly £11,500 more per year.
Key takeaways
IR35 is the UK tax rule that decides whether a contractor working through a Ltd company is taxed as a normal business (outside IR35) or as a deemed employee on PAYE (inside IR35).
Outside IR35 means you can pay yourself a small salary plus dividends after corporation tax, which is materially more tax-efficient than PAYE on the same revenue.
Since April 2021, the end client (not the contractor) decides status for most private-sector engagements. Get this wrong and the tax bill is retrospective.
The ideal Ltd company setup outside IR35: £12,570 salary, employer pension contributions, legitimate expenses, dividends from the remainder. £500 dividend allowance is small but free.