What IR35 actually is — and why it decides your take-home
IR35 — formally the off-payroll working rules — exists to answer one question: if your limited company didn't sit between you and your client, would you be their employee? When the answer is yes, the engagement is inside IR35 and the fee-payer must deduct income tax and National Insurance from your fees broadly as if you were on payroll. When the answer is no, you are outside IR35: your company invoices its fees gross, pays corporation tax on its profit, and you choose how to extract the rest — typically a small salary plus dividends.
The financial gap between those two answers is what this calculator measures. It is real money — several thousand pounds a year at typical rates — but it is smaller than it was before April 2026, and at high day rates it has narrowed to the point where the administrative weight of running a company deserves honest consideration alongside the headline figure.
One thing the calculator deliberately does not do is tell you which status applies to you. Status is determined by your working practices and your contract — substitution rights, control over how you work, mutuality of obligation — not by which column has the bigger number. For medium and large clients the decision is the client's, delivered in a Status Determination Statement. You can check a determination with HMRC's CEST tool.
Umbrella vs limited company: what actually differs
An umbrella company employs you. The agency pays your assignment income to the umbrella, which deducts its weekly margin, employer National Insurance at 15% and the 0.5% apprenticeship levy, then runs the remainder through PAYE like any salary. The deductions surprise people because the assignment rate is quoted gross of employer costs — the rate is not a salary offer. The honest way to model this is to unwind the employer costs from the rate with the exact reverse calculation, which is what the engine behind this page does (the formula is on the methodology page).
A limited company inside IR35 produces almost identical numbers to an umbrella minus the margin: the fee-payer deducts the same employer costs and PAYE before your company is paid. What's left arrives as a deemed payment you can pass to yourself without further tax. You keep the company — useful if you expect outside-IR35 work later — but gain little financially while the engagement is inside.
A limited company outside IR35 works differently end to end. The company banks the full fees, deducts allowable expenses and any employer pension contribution, pays a director salary (the £12,570 optimum is assumed here), pays corporation tax at 19–25% with marginal relief in between, and distributes the post-tax profit as dividends. You then pay dividend tax personally. More moving parts, more obligations — accounts, confirmation statements, VAT if registered, a Self Assessment return — and historically, meaningfully more take-home.
What changed in April 2026 — and who it hurts
The Autumn Budget 2025 raised dividend tax by two percentage points from 6 April 2026: the basic rate moved from 8.75% to 10.75% and the higher rate from 33.75% to 35.75%. The additional rate stayed at 39.35%. A contractor extracting profits up to the higher-rate threshold pays roughly £744 more than in 2025/26 on identical income; one extracting £80,000 of dividends pays around £1,500 more.
Because the rise lands entirely on the outside-IR35 route, it compresses the gap between the three ways of working. In our verification scenarios the outside advantage over umbrella falls from about £4,200/year at £400/day to under £1,500/year at £1,200/day — at high rates the corporation-tax main rate and the dividend additional rate stack up against the limited company. The era of "outside IR35 is always worth it" arithmetic is over; the honest answer now depends on your rate, pension contributions and expenses, which is exactly why every input above recalculates the comparison live.
Also still in force from April 2025: employer National Insurance at 15% above a £5,000 threshold — both worse than the previous 13.8% above £9,100 — which is why umbrella retention percentages look leaner than older articles suggest. Income tax thresholds remain frozen at £12,570 (personal allowance) and £50,270 (higher rate), pulling more contractors into higher bands each year. Scotland set its own bands in January 2026, raising the basic and intermediate thresholds by 7.4% while freezing the higher bands; the regional toggle applies them.
Reading your results like an accountant would
Retention percentage is the figure to anchor on, not the annual sum. Umbrella retention at typical rates lands between 49% and 60%; outside IR35 between 50% and 64%. If a calculator anywhere quotes you 75%+ retention outside IR35, it is quietly ignoring employer costs, the dividend rise, or both.
Pension contributions are the biggest lever you control. Salary-sacrifice or employer contributions come out before any tax or NI, so each £1,000 diverted to a pension costs you far less than £1,000 of take-home. Contractors near £100,000 of taxable income should pay particular attention: between £100,000 and £125,140 the personal allowance tapers away, producing a ~60% effective marginal rate that pension contributions can step you out of entirely.
Expenses only help outside IR35. Inside IR35 and umbrella engagements get no expenses relief in this model (the 5% allowance was abolished for client-determined engagements). If your legitimate business costs are substantial, that asymmetry widens the outside advantage beyond what the default £2,000 shows.
Finally, remember what the model assumes: one engagement, no other income, full profit extraction each year, and 2026/27 rates throughout. If you have rental income, a portfolio, or you retain profits in the company, your real numbers shift — the methodology page lists every assumption so you or your accountant can adjust for them.