Inside IR35 explained — what it means for your contract
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When a contract is inside IR35, HMRC treats your income as if you were an employee of the end client for tax purposes — while paying you none of the employment rights. You are taxed at source (through an umbrella or your own company's deemed-payment calculation), which typically removes 25–35% of what the same day rate pays outside IR35.
What changes mechanically
- Tax: income tax and National Insurance on the full rate, as employment income.
- No dividend route: corporation tax planning stops applying to caught contracts.
- Who pays: for medium/large clients (off-payroll rules, April 2021 onwards) the fee-payer withholds; for small clients you still self-assess under the original rules.
What does NOT change
Status is per-engagement. A caught contract does not taint your other contracts, and an inside-IR35 decision for one role says nothing about the next. The complete checklist for verifying the next one is in our evidence guide, and the take-home calculator shows the money side.
Your options when a contract is inside IR35
- Challenge it — assessments must be reasoned; see the disagreement routes.
- Rerate — many contractors reprice inside-IR35 work upward to offset the tax drag.
- Walk — the outside-IR35 live board exists precisely because supply is real.
How much does inside IR35 cost you?
Two forces stack: employer-side deductions (NI, in umbrella setups also the margin) come out of the assignment rate before your PAYE even starts, then income tax and employee NI apply to what remains. The compounding effect means a £600 outside-IR35 rate can net less than a £500 inside rate is worth negotiating — always compare net-to-net. The calculator shows both routes from the same headline rate.
Inside IR35 with a limited company: the deemed payment
Where no umbrella is involved, the fee-payer deducts tax and NI from a notional "deemed payment" and pays the net to your company; that net then counts as employment income in your books. Expenses rules are tighter than employees assume — travel to the client site is generally gone where the engagement mirrors employment. The one upside: no dividend tax on the deemed amount, because it never reaches dividends.
Does status affect future contracts?
No — each engagement stands alone. A caught contract says nothing about the next one; assessments consider the actual terms and working practices of each role. That is exactly why job-by-job evidence checking (our core guide) beats blanket assumptions in either direction.
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