Employed vs. Inside IR35 vs. Outside IR35: Take-Home Pay Compared
Standard employment applies Income Tax and employee National Insurance directly through PAYE. Working inside IR35 taxes contract income similarly to employment despite being paid through a limited company, typically resulting in comparable or slightly lower take-home pay after umbrella company fees. Working genuinely outside IR35 allows dividend-based extraction, which can meaningfully increase take-home pay due to lower dividend tax rates and no employee National Insurance on dividends.
The same gross contract rate can produce noticeably different take-home pay depending on IR35 status, which is exactly why the classification matters far beyond a compliance technicality.
Standard employment
Income Tax and employee National Insurance are deducted automatically through PAYE, and the employer separately pays employer National Insurance on top of the salary — a cost to the employer, not visible on the employee's payslip, but relevant when comparing to a limited company setup where a similar cost often falls on the individual instead.
Inside IR35
Contract income is taxed broadly as if it were employment income, even when paid through a limited company or umbrella company — Income Tax and National Insurance apply similarly to standard employment, and an umbrella company typically deducts its own fee on top, which can leave take-home pay comparable to or slightly below equivalent direct employment at the same gross rate.
Outside IR35
Working genuinely outside IR35 through a limited company allows income to be extracted partly as a modest salary (minimizing National Insurance) and partly as dividends, which are taxed at lower rates than equivalent salary income and aren't subject to employee National Insurance at all. This structure is the main reason outside-IR35 contracting can produce meaningfully higher take-home pay than the same gross rate inside IR35 or in direct employment — though it also carries the compliance responsibility of correctly determining and maintaining that status.