Business expenses claimed outside IR35 (travel, equipment, accountancy, etc.).
Director salary taken outside IR35. Default is the NI Primary Threshold (£12,570.00).
Inside IR35
Outside IR35
Annual Difference
+£4,675.67
Monthly Difference
+£389.64
Better Option
Working outside ir35 saves you £4,675.67 per year (£389.64 per month).
Everything you need to know about IR35 and its impact on your take-home pay
What is IR35 and why does it matter?
IR35 is UK tax legislation designed to identify contractors who work like employees but supply their services through an intermediary (typically a limited company). If your contract falls "inside IR35", HMRC considers you a "disguised employee" and you must pay employment-level taxes. If you are "outside IR35", you can legitimately structure your income through salary and dividends, often resulting in significant tax savings.
How does inside IR35 work?
When a contract is determined to be inside IR35, the contractor's income is treated as deemed employment income. The fee-payer (usually the recruitment agency or end client) must deduct PAYE income tax, employee National Insurance, and pay employer National Insurance. The contractor is allowed a 5% flat-rate expense deduction from gross income to cover business costs. This means you take home significantly less than if you were outside IR35.
How does outside IR35 work?
Outside IR35, you operate as a genuine business through your limited company. The company receives the contract income, deducts allowable business expenses, pays the director a small salary (usually at the NI threshold to minimise NI) and distributes the remaining profits as dividends after corporation tax. Dividends are taxed at lower rates than employment income (8.75% basic, 33.75% higher, 39.35% additional), which typically results in significantly higher net take-home pay.
Who decides IR35 status?
Since April 2021, for medium and large private sector clients, the end client is responsible for determining your IR35 status (the "off-payroll working rules"). For small private sector clients, the contractor still makes their own determination. HMRC's CEST (Check Employment Status for Tax) tool can help assess your status, though many contractors seek independent professional advice.
What is the 5% expense allowance?
Inside IR35, HMRC allows a flat-rate 5% deduction from gross contract income to cover the costs of running your limited company (accountancy fees, insurance, etc.). For example, on a £60,000 contract, you can deduct £3,000 as expenses. This is the only expense deduction available inside IR35 — you cannot claim individual business expenses such as travel, equipment, or training.
What expenses can I claim outside IR35?
Outside IR35, you can claim a wide range of legitimate business expenses against your company profits, reducing your corporation tax bill. Common allowable expenses include: professional indemnity insurance, accountancy fees, business travel and subsistence, home office costs, training and professional development, computer equipment and software, co-working space or office rent, professional subscriptions, and business telephone/broadband costs. All expenses must be incurred "wholly and exclusively" for business purposes.
HMRC-Aligned: This calculator uses official HMRC rates and thresholds for the 2025/26 tax year. IR35 status determinations are complex and fact-specific — this tool provides indicative comparisons only. For a formal IR35 assessment, consult a specialist IR35 adviser or use HMRC's CEST tool.
This calculator uses official rates and thresholds from:
Last verified: February 2026 · Tax year 2025/26. Results are indicative — consult a qualified accountant for personalised advice.
Reviewed by M. Samiuddin Quadri, ACCA — Chartered Certified Accountant at Gladstone & Co. · Updated for the 2025/26 tax year.
Disclaimer: This calculator provides estimates based on current HMRC rates and thresholds for the 2025/26 tax year. It does not constitute professional tax, financial, or legal advice. Your actual liability may differ depending on your individual circumstances. Always consult a qualified accountant or tax adviser before making financial decisions. Read our terms