IR35 Tax Calculator

What is IR35?

IR35 is HMRC's anti-avoidance legislation aimed at "disguised employees": people who work through a personal service company (PSC, usually a one-person Ltd) but whose day-to-day working relationship looks indistinguishable from that of an employee. If HMRC determines a contract is "inside IR35", the income is taxed as employment income rather than as dividends. That typically costs the contractor 20-30% more in tax and National Insurance over the year.

The rules were introduced in 2000 to stop the "Friday-to-Monday" abuse, where a worker left their employer on a Friday and started "consulting" for the same company on Monday, at the same desk, doing the same job, but billing through a Ltd to slash their tax bill. Twenty-five years on, IR35 has dragged in many genuine contractors who carry real commercial risk: no sick pay, no holiday pay, no employer pension, and 30-60 day payment terms on invoices. The calculator above shows the cash difference between the two treatments for the same gross contract rate.

Inside IR35 vs outside IR35

Outside IR35 means HMRC accepts that you are genuinely in business on your own account. You can pay yourself a small director's salary, take the rest as dividends, and the company pays corporation tax on its profits (19% on the first £50,000 of profit, marginal rate to £250,000, then 25%). Dividends are taxed in your personal return at 8.75%, 33.75% or 39.35% depending on your band, with a £500 dividend allowance on top of the personal allowance.

Inside IR35 means HMRC treats the contract as employment for tax purposes. The fee payer (usually the client or the agency in the chain) deducts income tax and employee National Insurance at PAYE rates before paying you, and employer NI (15% from 6 April 2025 onwards, up from 13.8%) is also deducted from the contract rate. You cannot extract anything as dividends. On a £500/day contract working 46 weeks a year (£115,000 gross), the difference between the two treatments is typically £15,000-£20,000 of annual take-home.

Who decides your IR35 status?

Before April 2017, the contractor (via their Ltd) made the IR35 determination. That changed in two stages:

• April 2017 (public sector reform): the public-sector end client became responsible for determining IR35 status, and the fee payer became liable for any unpaid tax if they got it wrong.
• April 2021 (private sector reform): the same rule was extended to medium and large private-sector clients. A client counts as "small" (and the contractor-side determination survives) if it satisfies two of: turnover under £10.2m, balance sheet under £5.1m, fewer than 50 employees.

The 2017/2021 reforms shifted the financial risk of getting the call wrong from the contractor to the client. The predictable result: many medium-large companies issued blanket "inside IR35" determinations for their entire contractor base, regardless of the underlying working arrangements. That is not a story about contractors paying their fair share. It is a story about risk-averse procurement teams making a call that gets the client off the hook and shifts the tax burden onto the worker.

The status tests that actually matter

Three factors dominate HMRC's view, with several secondary tests bolted on:

• Right of substitution. Can you send a qualified substitute to do the work in your place, with the client paying you (not the sub)? An unfettered right of substitution is the single strongest pointer to outside-IR35 status.
• Control. Does the client direct what you do, how you do it, when, and where? Employees are controlled; genuine contractors are engaged for a defined output.
• Mutuality of obligation (MoO). Is the client obliged to offer ongoing work and are you obliged to accept it? In a true contractor relationship, the engagement ends when the project ends, with no expectation of more.

Secondary factors include financial risk (do you bear the cost of fixing defects in your own time?), provision of your own equipment, exclusivity, integration into the client's team, and how long the engagement has been running. HMRC's own CEST tool applies a version of these tests but has been widely criticised for inconsistent outputs and for refusing to give a result on a meaningful proportion of cases. It is the only "official" guide, but it is not the final word.

Worked example: a £500/day contractor

Take a contractor on £500/day, working 5 days a week for 48 weeks (£120,000 gross annual contract revenue), no allowable expenses, no pension contribution, and a tax-efficient director's salary on the outside case. The calculator above produces something close to the following:

That difference is not the contractor "dodging" tax. It is the gap between corporation tax plus dividend tax on the one hand, and PAYE plus employee NI plus employer NI on the other. The employer NI hit (15% from April 2025) is the biggest single driver. Use the take-home pay calculator to compare the inside-IR35 figure with what a permanent salary would actually net.

The umbrella company alternative

Many contractors hit by the 2021 reform were pushed into umbrella companies. An umbrella employs you, deducts PAYE income tax and employee NI from your invoiced amount, hands you what is left after their margin (typically £20-£30 per week), and gets the client off the IR35 hook. In practice it is often the worst of both worlds: you pay full employment taxes (including employer NI, deducted from the assignment rate before you ever see it), but you still have no real employee benefits beyond what the umbrella chooses to offer.

Umbrella arrangements have also been a target for tax-avoidance scheme promoters offering "85% take-home" via loans, advances or offshore structures. These almost always end with HMRC catching up and the worker, not the promoter, on the hook for the tax. Avoid any umbrella whose pay is materially better than the inside-IR35 take-home shown above.

What to actually do about IR35

• Get a specialist contract review before signing any new engagement. Firms like QDOS and Bauer & Cottrell will review the contract and the working practices and give you a status opinion that you can rely on.
• Buy IR35 investigation insurance if you contract outside IR35. QDOS, Markel and similar providers offer tax-investigation cover that pays for representation and any settlement up to the policy limit. Worth it relative to the cost of defending an HMRC enquiry alone.
• Use the company for pension contributions. Outside IR35, employer pension contributions paid by the Ltd are deductible against corporation tax and bypass NI completely. See the pension carry forward calculator for how to use unused allowance from prior years.
• Model the dividend hit. The dividend tax calculator will show you how your dividend tax band changes if you take other income or take larger dividends in a single year.
• Reconsider the structure if every client is inside IR35. If you cannot find outside-IR35 work, a Ltd company is often no longer worth the accounting cost. Permanent employment or fixed-term contracts may net out better once you account for benefits, holiday and pension.

Get qualified advice before betting on a status determination

IR35 status is genuinely complex. The cases that have gone to the First-tier Tribunal and beyond turn on the specific facts of how the contract was operated in practice, not just what the paperwork says. Do not treat the output of this calculator, or the CEST tool, or any blog post (including this one) as a status determination. If you are operating outside IR35 or considering doing so, pay a specialist contractor accountant or IR35 adviser to review your specific arrangement.

Authoritative reading: gov.uk IR35 hub and the CEST tool.

Frequently asked questions