Inside IR35 vs Outside IR35 in 2026/27

IR35 is the UK's off-payroll working legislation. It exists to determine whether a contractor working through their own Limited Company is genuinely self-employed (Outside IR35) or effectively a "disguised employee" of the end client (Inside IR35). The status determination has significant tax consequences — but for the 2026/27 tax year, the consequences are not what they used to be.

The two outcomes

Outside IR35 means HMRC views the engagement as genuine self-employment. The contractor's Limited Company invoices the client, pays Corporation Tax on the profit, and the contractor takes salary plus dividends from the company. This historically resulted in significantly higher take-home than employment.

Inside IR35 means HMRC views the engagement as employment-in-disguise. The income is treated as PAYE — full income tax + employee National Insurance + (effectively) employer NI must come out before the contractor sees it. Most contractors deemed Inside IR35 work through an umbrella company that handles PAYE administration.

How status is determined

Three core tests apply: substitution (can you send a substitute?), control (does the client direct how you work?), and mutuality of obligation (is the client obliged to offer you work and you obliged to accept it?). HMRC's CEST tool attempts to automate the determination, though it's widely criticised for being conservative.

For engagements with medium and large clients, the client makes the determination. For engagements with small companies (turnover under £15m as of April 2026, raised from £10.2m), the contractor makes the determination. This shifted approximately 14,000 contractors back to self-determination on 6 April 2026.

The maths in 2026/27

This is where the conventional wisdom breaks down. Pre-April-2026, Outside IR35 was clearly more tax-efficient at virtually every income level. Now, with dividend tax up two percentage points, employer NI at 15%, and the corporation tax marginal band of 26.5% effective rate between £50K and £250K profit, the gap has narrowed sharply — and at most income levels with the conventional £12,570 director salary, permanent employment narrowly beats Outside IR35 Limited Company on cash take-home.

Try the contractor pay comparison calculator at your own day rate. At £500/day (£115K gross), the spread is approximately:

• Permanent: £74,300 net
• Outside IR35 Ltd: £72,300 net
• Inside IR35 Umbrella: £68,100 net

Outside IR35 still beats Umbrella at every income level — that's a £4,200 difference at £115K gross. But it doesn't beat the equivalent permanent salary unless you're using pension contributions, retained profit, or business expenses to leverage the Ltd's tax-deferral advantages.

When Outside IR35 still wins

Outside IR35 still wins clearly when:

1. You make significant employer pension contributions through the company. Pension contributions are deductible from company profit before Corporation Tax. The Ltd's CT-efficient pension routing is the single biggest reason to keep the Limited Company.
2. You can defer profit retention. Don't draw all dividends in the same year. Retain profit in the company across years to smooth into lower tax bands.
3. You have legitimate business expenses. Anything genuinely "wholly and exclusively" for business — equipment, training, professional subscriptions — reduces taxable profit.
4. You're in the higher-rate territory. Above approximately £150K, the income tax 45% additional rate kicks in for permanent employment, while the Ltd dividend route caps at 39.35% additional dividend rate. The math flips back in Ltd's favour at very high incomes.

The honest summary

For a 2026/27 contractor with no pension contribution and no retained profit, the choice between Outside IR35 Ltd and Permanent is approximately a wash on cash take-home — with Permanent narrowly ahead in most cases. The Limited Company structure still has real advantages, but they require active tax planning to capture. If you've been operating on autopilot, this is the year to recalculate.

The contractor calculator shows your specific number. The optimal director salary calculator shows whether your current salary choice is the most efficient.