Written and reviewed by James Whitfield · Updated for 2026/27 · Editorial standards · Methodology
Whether you are inside or outside IR35 significantly affects your take-home pay as a contractor. This guide compares limited company, umbrella company and PAYE net pay at common contractor day rates.
Contractor take-home pay varies significantly based on IR35 status and operating structure. Inside IR35 via umbrella produces PAYE-equivalent results; outside IR35 via limited company allows higher extraction efficiency.
Unlike PAYE employees, contractors typically work through one of three structures: a personal service company (limited company, often called 'Ltd'), an umbrella company, or directly as a PAYE employee of the end client. Each structure has different tax implications, different employment costs and different net pay outcomes at the same gross day rate.
The most important distinction is IR35, the off-payroll working rules introduced to prevent disguised employment. If HMRC or an end client determines that a contractor's working relationship resembles employment (same hours, same degree of control, integrated into the organisation), the contract is 'inside IR35'. Income from inside-IR35 contracts is treated as employment income for tax and NI purposes, which removes the tax advantages of limited company contracting.
Since April 2021, the determination of IR35 status for medium and large-sized clients shifted from the contractor to the end client. This means the end client or the fee-paying entity in the supply chain is responsible for deciding whether IR35 applies, and the contractor bears the consequences in take-home pay. Understanding your status and its implications before signing a contract is essential.
A contractor operating outside IR35 through a limited company can typically achieve higher take-home pay by combining a small salary with dividend income. The optimal combination for 2026/27 is often a salary at the secondary NI threshold (approximately £9,100) to avoid employer NI, with the remainder as dividends from company profits after 19% corporation tax.
Dividends are taxed at lower rates than employment income: 8.75% basic rate on dividends above the £500 dividend allowance (lower than 20% income tax), and 33.75% higher rate (lower than 40% income tax). For a contractor earning the equivalent of £80,000 per year in contracts, carefully structured salary-plus-dividends through a limited company could produce take-home significantly above the equivalent PAYE position.
However, this requires accountancy costs (typically £1,200–£2,500/year for a simple contractor Ltd company), carries greater administrative burden, and requires the contractor to manage corporation tax, VAT where applicable, and annual accounts. It is also only available for genuine outside-IR35 contracts, if work is inside IR35 but structured as Ltd, HMRC can recover the full PAYE equivalent tax liability with interest and penalties.
When a contract is inside IR35, the contractor is treated as an employee for tax purposes. The two main routes are an umbrella company (which employs the contractor and pays them a PAYE salary) or being engaged directly as a PAYE employee of the end client or recruitment agency.
Umbrella companies receive the gross contract rate, deduct employer NI (currently 15% on earnings above £9,100 for 2026/27), deduct their margin (typically £15–£35/week), deduct employee NI, and deduct PAYE income tax, then pay net salary. The umbrella employer NI is a cost that comes directly from the contract rate, reducing the amount available for take-home pay. At a contract rate of £500/day, the umbrella deducts approximately £44/day in employer NI before even calculating employee deductions.
The practical take-home from an umbrella arrangement at £500/day (230 days/year = £115,000 gross contract rate) is typically in the range of £65,000–£75,000 after all deductions, including employer NI, umbrella margin, employee NI and income tax. The exact figure depends on expenses claimed, pension contributions, and the specific umbrella's fee structure. Use a dedicated umbrella calculator alongside the PAYE salary calculator for the most accurate estimate.
A common question is: what day rate is equivalent to a particular PAYE salary? The rough rule is to divide the desired PAYE salary by 230 (typical working days per year) and then add 30–40% to cover employer NI, umbrella costs, loss of employment benefits, and the absence of paid holiday, but only if you are inside IR35 on an umbrella.
For outside-IR35 limited company contractors, the comparison is more complex because the limited company pays corporation tax on profits and you extract income via dividends. A PAYE salary of £60,000 (take-home approximately £3,780/month or £45,360/year) might be equivalent to an outside-IR35 day rate of approximately £280–£320/day, depending on expenses and accountancy costs.
For inside-IR35 umbrella contractors, the same PAYE take-home of £45,360/year requires a gross contract rate that covers employer NI, umbrella fees and employee deductions. A rough calculation suggests you need approximately £60,000–£65,000 in gross contract income to take home £45,360 on umbrella PAYE, equivalent to approximately £260–£280/day at 230 days/year.
Current tax-year thresholds used across this guide and calculator.
IR35 is the off-payroll working legislation that determines whether a contractor is treated as self-employed or as a disguised employee. If a contract is inside IR35, the income is taxed as employment income (PAYE rates apply), removing the tax efficiency advantages of limited company contracting. Since April 2021, medium and large clients determine the IR35 status, not the contractor.
For an inside-IR35 umbrella arrangement, employer NI (15% on earnings above approximately £9,100) is deducted from the contract rate before employee calculations begin. At a day rate of £500 (230 days/year), employer NI alone reduces available income by approximately £10,000 before employee NI, income tax and the umbrella margin are applied.
Outside IR35 via limited company, approximately £300–£350/day (depending on expenses and accountancy structure). Inside IR35 via umbrella, approximately £340–£380/day because employer NI and umbrella fees must be covered from the gross rate. The exact figure depends on your specific expense profile and umbrella terms.
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