IR35 Tax Calculations: What You'll Actually Pay

One of the most common questions I get from contractors is "how much will I actually take home?" The answer depends on your IR35 status, your income level, and how you structure your affairs. In this guide, I will work through detailed calculations at multiple income levels so you can see exactly what the numbers look like for your situation.

All calculations use the 2025/26 tax year figures. I have kept things practical — these are the numbers you will see on your payslip or in your accounts, not theoretical models.

Understanding the Tax Mechanics

Before diving into specific calculations, let me explain the mechanics that drive the difference between inside and outside IR35.

Outside IR35, your personal service company (PSC) receives the gross contract income. After deducting allowable business expenses, the company pays corporation tax on its profits. You then extract money from the company through a combination of salary and dividends. Dividends are taxed at lower rates than employment income, and there is no National Insurance on dividends. This is why outside IR35 is more tax-efficient.

Inside IR35, the income is treated as if it were employment income. The fee-payer deducts employer's NI, PAYE income tax, and employee NI before paying your company. You are allowed a 5% allowance to cover the costs of running your PSC. The practical effect is that you pay tax at employment rates, which are significantly higher than the salary-plus-dividends approach.

According to HMRC's off-payroll working rules, deemed employment payments inside IR35 are subject to PAYE and NIC as employment income.

Key Tax Rates for 2025/26

For reference, the relevant tax rates are:

• Personal allowance: £12,570
• Basic rate income tax: 20% (£12,571 to £50,270)
• Higher rate income tax: 40% (£50,271 to £125,140)
• Additional rate income tax: 45% (over £125,140)
• Employee NI: 8% on earnings between £12,570 and £50,270; 2% above £50,270
• Employer NI: 13.8% on earnings above £5,000 (secondary threshold)
• Corporation tax: 19% (small profits rate, profits under £50,000) to 25% (profits over £250,000), with marginal relief between
• Dividend tax: 8.75% (basic), 33.75% (higher), 39.35% (additional)
• Dividend allowance: £500

Calculation 1: Day Rate £350 (Annual Gross £77,000)

Assumptions: 220 working days per year, allowable business expenses of £4,000.

Outside IR35

Company income: £77,000. After £4,000 expenses, profit is £73,000.

Corporation tax: Using the small profits rate and marginal relief, approximately £15,590.

After corporation tax, approximately £57,410 is available for extraction.

Optimal approach: Salary of £12,570 (at the NI threshold), remainder as dividends.

Dividends of £44,840. After the £500 dividend allowance:

• Basic rate (up to £37,700 total income, minus £12,570 salary = £25,130 at basic): £25,130 at 8.75% = £2,199
• Higher rate (remaining £19,210): £19,210 at 33.75% = £6,483

Total personal tax: £2,199 + £6,483 = £8,682. Total NI: minimal (salary at threshold).

Take-home: approximately £48,728

Inside IR35

Gross income: £77,000. 5% allowance: £3,850. Deemed income: £73,150.

Employer NI (13.8% on earnings above £5,000): approximately £9,405.

Income subject to PAYE: £63,745.

Income tax: £0 on first £12,570 + £7,540 on next £37,700 + £5,390 on remaining £13,475 = £12,930.

Employee NI: £3,016 on £37,700 (8%) + £270 on £13,475 (2%) = £3,286.

Take-home: approximately £47,529

Difference: approximately £1,199 per year — relatively modest at this income level.

Calculation 2: Day Rate £500 (Annual Gross £110,000)

Outside IR35

Company income: £110,000. Expenses: £5,000. Profit: £105,000.

Corporation tax (marginal relief applies): approximately £24,020.

After corporation tax: £80,980 available.

Salary: £12,570. Dividends: £68,410.

Basic rate dividends (£25,130 at 8.75%): £2,199. Higher rate dividends (£42,780 at 33.75%): £14,438. Dividend allowance saves: £169.

Total personal tax: £16,468.

Take-home: approximately £64,512

Inside IR35

Gross: £110,000. 5% allowance: £5,500. Deemed income: £104,500.

Employer NI: approximately £13,728.

Income subject to PAYE: £90,772.

Income tax: £0 + £7,540 + £16,201 = £23,741.

Employee NI: £3,016 + £811 = £3,827.

Take-home: approximately £63,204

Difference: approximately £1,308 per year. Still relatively close due to how the marginal corporation tax rate has narrowed the gap at these income levels.

Calculation 3: Day Rate £650 (Annual Gross £143,000)

Outside IR35

Company income: £143,000. Expenses: £6,000. Profit: £137,000.

Corporation tax (25% on most of this): approximately £32,840.

After corporation tax: £104,160 available.

At this level, the personal allowance begins to taper (income over £100,000 loses £1 of allowance for every £2 over). This affects the optimal extraction strategy.

Salary: £12,570. Dividends: £91,590.

Tax on dividends (accounting for higher and additional rate bands): approximately £28,900.

Take-home: approximately £75,260

Inside IR35

Gross: £143,000. 5% allowance: £7,150. Deemed income: £135,850.

Employer NI: approximately £18,058.

Income subject to PAYE: £117,792.

Income tax (including personal allowance tapering): approximately £37,000.

Employee NI: approximately £4,350.

Take-home: approximately £76,442

At this income level, inside IR35 actually produces comparable or slightly better take-home. This is counterintuitive but results from the interaction of corporation tax at 25%, the personal allowance taper, and dividend tax at higher rates. The gap between inside and outside IR35 narrows significantly at very high income levels.

Key Insights from the Numbers

Several important observations emerge from these calculations:

The gap is smaller than many contractors think. The popular belief that being inside IR35 costs £15,000-20,000 per year is outdated. Since corporation tax increased to 25%, the tax advantage of operating through a PSC has narrowed considerably.

Income level matters. The gap is most significant at moderate incomes (£80,000-120,000) and narrows at both lower and higher ends.

Expenses matter. Legitimate business expenses reduce your corporation tax liability outside IR35 and are included in the 5% allowance inside IR35. Maximising expense claims is important in both scenarios.

Pension contributions are the wildcard. Employer pension contributions from your PSC are not subject to corporation tax or personal tax, making them one of the most tax-efficient ways to extract money. This is true both inside and outside IR35.

For a broader comparison of the financial impact, see my guide on inside vs outside IR35.

What About VAT?

If your PSC is VAT-registered, the numbers shift slightly. VAT on your fees is collected and remitted but does not affect your income tax or NI calculations directly. However, VAT on business expenses is recoverable, slightly reducing your net costs.

For contractors on the flat rate VAT scheme, there may be a small surplus or deficit depending on your sector percentage. This is a marginal consideration compared to the income tax and NI differences.

Pension Planning

Regardless of your IR35 status, pension contributions are one of the most tax-efficient uses of your money. Inside IR35, you can make employee pension contributions which reduce your taxable income. Outside IR35, you can make employer pension contributions from your PSC, which are a deductible business expense.

The annual pension allowance is currently £60,000, with the ability to carry forward unused allowance from the previous three years. For contractors earning above £100,000, the tapered annual allowance may apply, reducing the amount you can contribute.

As MoneyHelper advises, self-employed and contracted workers should prioritise pension contributions to compensate for the lack of employer auto-enrolment.

Use Accounted for Your Contractor Tax

These calculations illustrate why understanding your tax position is so important. Accounted helps contractors track their income, expenses, and tax liability throughout the year. I provide real-time estimates of what you will owe, helping you plan ahead and avoid surprises.

Whether you are inside or outside IR35, Accounted's capital gains tax tools and self-assessment support ensure you are compliant and efficient.

Ready to get your contractor tax under control? Visit our pricing page and let me handle the numbers.

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