Inside IR35: Making the Best of a Deemed Employment

What inside IR35 actually means for your money

An inside IR35 determination says that, for tax purposes, the engagement looks like employment. It does not make you an employee of the client, and it does not change your contract. What it changes is who taxes your fee and how. Under Chapter 10 of Part 2 ITEPA 2003, the fee-payer must deduct income tax and employee National Insurance through PAYE before anything reaches you or your company, and must account for employer National Insurance on top. Most contractors on inside engagements end up paid through an umbrella company, which becomes their actual employer and runs the same deductions through its payroll.

The part that surprises people is not the income tax. It is that the employment costs an employer would normally bear, principally employer NIC at 15% above the £5,000 secondary threshold and the 0.5% apprenticeship levy where the umbrella applies it, come out of the assignment rate the client pays. Commercially, the contractor funds both sides of the payroll. That is why two contractors on the same headline day rate, one inside and one outside, take home very different amounts.

A worked example at £500 a day

The figures below are an illustration only, using 2026/27 rates and thresholds, rounded to the nearest pound. They assume a £500 day rate, 220 days worked in the year, an umbrella margin of £25 a week over 48 weeks, a standard 1257L tax code, no student loan and no pension contributions. Your own numbers will differ, but the shape will not.

• Assignment income: 220 days at £500 gives £110,000 paid to the umbrella.
• Umbrella margin: £1,200 for the year, leaving £108,800 to fund the payroll.
• That £108,800 covers gross pay plus employer NIC at 15% above £5,000 plus the 0.5% apprenticeship levy, which works back to gross pay of £94,848.
• Employer NIC: 15% of £89,848 (gross pay less the £5,000 secondary threshold) is £13,477.
• Apprenticeship levy: 0.5% of £94,848 is £474. Together with gross pay these account for the £108,800, within £1 of rounding.
• Income tax on £94,848: the £12,570 personal allowance leaves £82,278 taxable. The first £37,700 at 20% is £7,540 and the remaining £44,578 at 40% is £17,831, so £25,371 in total.
• Employee NIC: 8% on earnings between £12,570 and £50,270 is £3,016, plus 2% on the £44,578 above the upper earnings limit, £892, so £3,908 in total.
• Take-home pay: £94,848 less £25,371 tax and £3,908 employee NIC leaves £65,569 for the year.

So from £110,000 invoiced, £65,569 arrives in the bank, about 59.6%. Just over £40,000 has gone in tax and National Insurance and £1,200 to the umbrella. Of that tax bill, £13,951 is employer NIC and levy, money an employee never sees deducted from a payslip because their salary is quoted after it. This is why an inside day rate needs to be meaningfully higher than an outside one, or a salary, to deliver the same standard of living. It is also why every line of an umbrella payslip deserves checking, a discipline that matters even more now that the joint and several liability rules for umbrella PAYE apply from 6 April 2026.

The few expenses you can still claim

Inside IR35, the expense position is bleak but not quite empty. Travel and subsistence relief for ordinary home-to-client commuting is blocked for workers under supervision, direction or control, which HMRC presumes for inside engagements, so the daily train ticket and lunch are a personal cost. What survives is narrower and worth knowing precisely.

• Pension contributions, ideally by salary sacrifice through the umbrella, covered in the next section.
• Professional subscriptions to bodies on HMRC's approved list, claimable through self assessment if not reimbursed.
• Travel to genuinely temporary workplaces that are not your main client site, for example occasional visits to a secondary office, where the umbrella's policy and the rules allow it.
• Expenses the client agrees to reimburse under the contract, such as billable travel to other sites, which are the client's cost rather than a tax relief.
• Charitable giving through payroll where the umbrella offers it, which comes off pay before tax.

Be wary of any umbrella marketing an expenses model that promises to restore the old relief, or a take-home percentage that looks too good against the arithmetic above. Those schemes have a long record of ending in loan charge style misery for the worker, and the worker is the one HMRC pursues.

Pension salary sacrifice is the biggest lever you have

Salary sacrifice is the one mechanism that beats every deduction at once. An amount you sacrifice into a pension comes off pay before income tax, before employee NIC and before employer NIC and the levy, because it reduces the payroll cost itself. No other inside-IR35 planning touches the employer-side charges.

Take the example above and sacrifice £10,000 of gross pay, all of which would otherwise have been taxed at 40% and 2%. Take-home falls by only £5,800, since £4,200 of it was going to HMRC anyway. Meanwhile the payroll cost of that £10,000 falls by £1,500 of employer NIC and £50 of levy, and a good umbrella passes most or all of that saving into the pension as well. Roughly £11,500 lands in the pension at a net cost of £5,800, again as an illustration rather than a quote. The caveats: the umbrella must actually offer salary sacrifice and pass on the employer NIC saving, the annual allowance (£60,000 for most people in 2026/27) caps how much can go in with relief, and pension money is locked away until at least your late fifties. For a contractor earning above £100,000, sacrifice has a second benefit, pulling income back below the level where the personal allowance starts to taper.

Running a PSC on inside contracts

You can keep your limited company and have it paid on an inside engagement. The fee-payer deducts tax and NIC and pays the net amount to the company as a deemed direct payment. The company can then pass that money to you without further tax, since it has already been taxed as your employment income, and it does not count towards the company's profits for corporation tax. What you cannot do is convert inside income into dividends to reach the lower dividend rates. The tax has been settled at source and the structure saves nothing on that engagement.

So when does keeping the PSC make sense? Mainly when the inside contract is an interlude rather than a destination. If you expect outside engagements to return, if you run other business income through the company, or if the company holds retained profits you are drawing down gradually, keeping it alive through an inside spell is usually cheaper than closing and reopening. Accountancy fees, insurance and a confirmation statement are a modest holding cost. If instead you have moved inside permanently, the calculation flips, and extracting retained profits through a members' voluntary liquidation at capital rates often beats drip-feeding dividends at 35.75% in the higher band from 6 April 2026.

Mixing inside and outside contracts in one tax year

Plenty of contractors finish an outside engagement in the spring and start an inside one in the autumn, or run both at once for different clients. Nothing prevents it, but the two income streams must be kept apart because they are taxed on completely different tracks. The inside income arrives already taxed, through the umbrella's payroll or as a deemed direct payment to the company. The outside income arrives gross, becomes company turnover, bears corporation tax at 19% to 25% depending on profits, and reaches you as salary and dividends.

Three practical points keep this clean. First, never pay dividends out of deemed direct payments; dividends can only come from the profits of the outside work, and a mixed bank account makes that distinction hard to prove. A separate ledger, or simply a clear narrative on every receipt, is enough. Second, watch the personal tax position across both streams. PAYE on the inside contract will not know about your dividends, so a self assessment liability builds up during the year and the £500 dividend allowance and basic rate band are shared across everything. Third, the umbrella employment may put you on an emergency or split tax code mid-year, which usually washes out through self assessment but can dent cash flow. A specialist accountant can map the combined position before the year end rather than after it, when the options have closed. And an inside spell does not have to be permanent: the evidence habits in the guide to building a defensible outside position are what make the route back available.

The 5% allowance survives only where Chapter 8 applies

Under the original intermediaries legislation in Chapter 8, a company calculating its own deemed employment payment may deduct a flat 5% of the engagement income to cover running costs before working out the tax. The 2017 and 2021 off-payroll reforms removed that allowance wherever the client makes the determination under Chapter 10, which is why most inside contractors have not seen it for years.

From 6 April 2026 it matters again. The company size thresholds rose to £15 million turnover and £7.5 million balance sheet total, with the employee limit staying at 50, so a band of clients moved from medium to small. Where the client is small, Chapter 8 applies: your company determines status, and if the engagement is inside, the company computes the deemed payment itself and the 5% allowance is back in the calculation. On £100,000 of relevant engagement income, £5,000 comes off before tax and NIC. It is not transformative, but it is real money, and it only exists if the deemed payment is computed correctly, which is precise and unforgiving work. The mechanics of who counts as small are in the guide to the small company threshold change.

The employment rights you do not get

Inside IR35 is sometimes described as all of the tax of employment with none of the rights, and for tax-law purposes that is accurate. A deemed employment under the IR35 rules is a tax construct only. It does not, by itself, give you holiday pay, statutory sick pay, statutory redundancy pay, parental leave rights, pension auto-enrolment from the client or protection from unfair dismissal. The client is not your employer just because its status determination says the engagement resembles employment.

Where rights do exist, they come from a different source. If you work through an umbrella, the umbrella is your actual employer, so you get statutory employment rights from that relationship: holiday pay, SSP if you meet the earnings conditions, auto-enrolment and the rest, funded in practice from your assignment rate. Separately, the Agency Workers Regulations can give equal-treatment rights after twelve weeks in the same role, but those flow from agency-worker status, not from the IR35 determination, and you can read the basics in the government guidance on agency workers' rights. If you are paid as a deemed direct payment through your own PSC, with no umbrella in the chain, you have no employer but your own company and no new rights at all. Anyone weighing an inside offer should price that absence into the rate, because the comparison with a salaried job is worse than the headline figures suggest.

Making the best of it

An inside determination you cannot overturn is a constraint to optimise within, not a verdict on your career. The playbook is short. Negotiate the rate with the full payroll cost in view, since the client's budget includes employer NIC whether or not the offer letter mentions it. Choose an umbrella that is transparent on its payslip and genuine on salary sacrifice, then sacrifice as much into the pension as your cash flow allows. Claim the narrow expenses that survive. Decide deliberately whether the PSC stays open or closes well. And if the determination itself looks wrong on the facts, challenge it through the client-led disagreement process, which obliges the client to respond within 45 days. A specialist accountant can run the numbers on each of these choices for your own rate and circumstances, which is where the generic illustration above stops being useful.