UK Contractor Resources

Why Inside IR35 Can Be Worse Than PAYE

Many contractors are surprised to find that working inside IR35—especially through an umbrella company—can actually leave them worse off than a permanent PAYE employee on the same gross pay. This is because umbrella workers pay both employee and employer National Insurance, umbrella fees, and lose access to most tax-efficient expenses and allowances. As a result, contractors should target higher contract rates than they would for equivalent PAYE roles to maintain their take-home pay.

• Umbrella fees: Typically 4–5% of gross pay, deducted before tax
• Employer NI: Deducted from your contract rate, unlike PAYE where the employer pays it
• Limited expenses: Most business expenses are not claimable inside IR35

Why Outside IR35 Still Offers Tax Advantages

Contractors working outside IR35 through their own limited company can still benefit from several tax advantages:

• Dividends: Profits can be taken as dividends, taxed at lower rates than salary
• Corporation tax: Company profits are taxed at 20%, often lower than higher-rate income tax
• Business expenses: Legitimate expenses (equipment, training, travel) are fully deductible
• Pension contributions: Company can pay directly into your pension, reducing taxable profits
• Spreading income: Flexibility to manage salary/dividend mix and timing

These advantages mean that, even at the same gross rate, outside IR35 roles can deliver significantly higher take-home pay than both inside IR35 and PAYE employment.