UK Contract Type Guide · 2026
What is the difference between inside and outside IR35?
Definition
Inside IR35: contract + working practices indicate the worker would be an employee if engaged directly. Outside IR35: contract + working practices indicate genuine business-to-business arrangement. The Off-Payroll Working Rules (Chapter 10 ITEPA 2003) apply when client is medium/large; original IR35 (Chapter 8 ITEPA 2003) applies when client is small.
Rights and protections
Same as broader IR35: tax categorisation only, doesn't confer employment rights. INSIDE IR35: no contractor benefits but also no employee rights (worst of both worlds for many). OUTSIDE IR35: full contractor flexibility but accepts business risk (no holiday, sick pay, redundancy).
Employer obligations
End client must issue Status Determination Statement (SDS) before contract starts, take reasonable care in determination, provide reasoning, operate dispute resolution. If determined inside IR35, end client (or fee-payer in chain) operates PAYE on payments to PSC.
Tax and pay implications
OUTSIDE IR35 (illustrative for £100k gross via ltd): salary £12,570 (NI threshold), dividends £87,430. Corporation tax at 19-25% on profits, dividend tax at 8.75-39.35% depending on rate band. Effective net take-home: ~£75,000-£82,000 (75-82% of gross). INSIDE IR35 (illustrative for £100k gross): treated as deemed employment income; PAYE deductions; no business expense deductibility through PSC; net: ~£60,000-£68,000 (60-68%). Difference: £10,000-£20,000 per year on £100k gross.
Common use cases
OUTSIDE IR35: short-term project work, multiple clients, substitution rights, defined deliverables, financial risk. INSIDE IR35: long-term single-client engagements, fixed hours, integrated into client's team, no substitution rights, ongoing relationship.
Worked example
Tom had a £600/day contract assessed inside IR35. Annual gross: ~£135,000. Net under inside IR35 (after PAYE): ~£82,000. He moved to a different engagement at £550/day but properly outside IR35 (substitution clauses, multiple clients). Annual gross: ~£124,000. Net under outside IR35: ~£93,000. Despite lower gross, his net was £11,000 higher — and he had legitimate business expense deductions on top. The £50/day pay cut was more than compensated by the IR35 status difference.
Recruiter pro tip
Many contractors accept inside IR35 determinations because they want the work — but the take-home difference (£10k-£25k/year on a typical contract) makes outside IR35 engagements significantly more valuable. Always assess the post-tax position, not the headline day rate. £600/day inside IR35 ≈ £450/day outside IR35 in take-home terms. Negotiate based on net, not gross. Consider whether you can restructure the engagement (clauses, working practices) to legitimately fall outside.
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