Journal · 12 June 2026

Inside vs outside IR35 in 2026/27: the gap just got smaller

For fifteen years the contractor calculus was simple: outside IR35 paid meaningfully more, end of analysis. The April 2026 dividend tax rise didn't end that — but it changed the numbers enough that the answer now genuinely depends on your rate.

What changed on 6 April 2026

The Autumn Budget 2025 added two percentage points to dividend tax: the basic rate rose from 8.75% to 10.75%, the higher rate from 33.75% to 35.75%. The additional rate stayed at 39.35%. That lands exclusively on people who extract profits as dividends — which is to say, on the outside-IR35 limited company route. Umbrella and inside-IR35 take-home is untouched.

A contractor paying themselves the standard £12,570 salary and filling the basic band with dividends pays £744 more this year than last on identical income. Extract £80,000 of dividends and the rise costs roughly £1,500.

The numbers at three day rates

Using our take-home calculator with its default settings (220 days, 5% pension, £2,000 expenses, £25/week umbrella margin):

Read that last column again. At £400/day, outside IR35 still buys you a holiday's worth of extra take-home. At £850/day it buys you about £150 a month — before you pay an accountant, file the accounts, run the payroll, chase the confirmation statement, and carry the risk of an HMRC status enquiry.

Why the gap shrinks as rates rise

Three effects compound at higher rates. Corporation tax climbs from 19% towards 25% as profits pass £50,000 (with marginal relief biting hardest between £50,000 and £250,000). More of the extracted dividends fall into the 35.75% higher band and then the 39.35% additional band. And above £100,000 of total income the personal allowance tapers away, taxing even the "tax-free" director salary. Meanwhile the umbrella route's costs are broadly proportional — so the percentage gap narrows.

What this doesn't change

Two things, importantly. First: status was never a choice. If your working practices are employment in all but name, you're inside IR35 whatever your spreadsheet prefers — and the client usually makes that determination now, not you. Second: pensions still dominate the arithmetic. An employer pension contribution avoids every tax in this article on the way in. If the inside-vs-outside delta at your rate is under £2,000, a well-set-up salary-sacrifice arrangement through an umbrella can be worth more than the structural difference.

The honest conclusion

Below roughly £500/day, outside IR35 remains clearly worth pursuing where the engagement genuinely qualifies. Above £800/day, treat it as a fine-margin decision: run your own numbers, price in the accountancy fee (£1,000–£1,800/year), and weigh the admin honestly. Between the two, it depends on your pension and expenses — which is what the calculator is for.

Figures generated by our 2026/27 engine, rates verified 12 June 2026. Guidance only — not financial advice; status decisions belong with working practices and professional advisers, and the assumptions behind every figure are on the methodology page.