TD
Key Takeaways
- IR35 asks whether a contract is genuinely business-to-business or employment wearing a different label.
- Outside IR35 means paying yourself through a limited company; inside IR35 is taxed broadly like employment.
- Since the 2021 reforms, the client usually determines status for medium and large private sector engagements.
- A day rate is not comparable to a salary — you absorb holiday, pension, sick pay and gaps between contracts.
- Umbrella companies exist for inside-IR35 work; check deductions carefully and avoid anything promising unusually high take-home.
Contracting is a well-established UK career path, particularly in technology, engineering and finance, and the day rates look dramatic next to a salary. The complication is IR35, which determines how the money is taxed and can change your take-home substantially for identical work.
This guide covers what IR35 actually asks, how the two statuses differ in practice, and how to compare a rate to a salary honestly.
Tax rules change and status is fact-specific. This is an orientation, not advice — talk to an accountant before committing.
If you are still searching, check your CV parses — the free ATS score checker.
What IR35 is actually asking
One question: if we removed the intermediary company, would this look like employment?
The tests come from employment case law rather than a checklist, but three factors dominate:
Control. Does the client direct how, when and where you work? An employee is told; a contractor delivers an outcome.
Substitution. Could you send a suitably qualified substitute in your place? A genuine, unfettered right of substitution points strongly to being outside.
Mutuality of obligation. Is the client obliged to offer work and are you obliged to accept it? Employment implies ongoing obligation; a contract for a defined deliverable does not.
Other factors weigh too — whether you use your own equipment, take financial risk, work for multiple clients, and are integrated into the client's organisation.
Status depends on the reality of the engagement, not the contract wording. A contract asserting a right of substitution that would never be permitted in practice does not help you.
Who decides
Since the 2021 reforms, for medium and large private sector clients and for the public sector, the client determines status, not you. They issue a Status Determination Statement.
Small companies are exempt, and there the contractor's own limited company remains responsible for determining status.
Why this matters: many clients responded to the reform by declaring blanket inside-IR35 policies to avoid risk, which reduced the availability of genuinely outside roles. That is why postings now state status explicitly, and why "outside IR35" appears as a selling point in adverts.
Inside versus outside in practice
Outside IR35. You operate through your own limited company. You can pay yourself through a combination of salary and dividends, claim legitimate business expenses, and control the timing of income. Take-home is materially higher for the same day rate. You carry the administration — accounts, VAT possibly, corporation tax, insurance.
Inside IR35. Income is taxed broadly as employment. In practice most inside engagements run through an umbrella company, which employs you and payrolls the income. Take-home is substantially lower than the same rate outside.
The same day rate means very different money depending on status. A rate that is attractive outside IR35 may be worse than a salary once inside — which is why the status line in a job advert matters as much as the number.
Umbrella companies
For inside-IR35 work you are usually paid through an umbrella company, which employs you and handles PAYE.
What to check:
The margin. The umbrella's own fee, usually a weekly or monthly amount. Compare across providers.
Employer costs. Employer National Insurance and the apprenticeship levy are frequently deducted from the assignment rate before your pay is calculated. This surprises people badly — the headline rate is not what your employment costs are calculated on.
Holiday pay handling. Whether it is rolled up into the rate or accrued separately. Rolled-up pay makes the rate look higher than it is.
Pension. Auto-enrolment applies.
Avoid schemes promising unusually high take-home. Arrangements involving loans or offshore structures have left large numbers of contractors with substantial retrospective tax bills. If the take-home percentage looks far better than every other provider, that is the warning sign, not the selling point.
Comparing a day rate to a salary
The arithmetic people skip.
A day rate must cover what an employer would otherwise provide:
- Holiday — around 5.6 weeks statutory equivalent, roughly 11% of working days
- Bank holidays — eight days you do not bill
- Sick pay — none
- Pension — no employer contribution outside IR35
- Gaps between contracts — the big one, and the most underestimated
- Accountancy and insurance — professional indemnity, public liability
- Training — your cost now
A rough method: assume perhaps 44 billable weeks a year rather than 52, multiply by five days, then subtract pension, insurance and accountancy. Compare that with the salary equivalent including employer pension.
Contracting frequently still wins financially, particularly outside IR35 — but by less than the raw multiplication suggests. The same logic applies as in contract vs full-time in the US, with IR35 as the UK-specific wrinkle.
Finding contract work
Agencies dominate contract hiring in the UK far more than permanent hiring — see the UK recruitment agencies guide.
Adverts state IR35 status. Read it before the rate, because it changes what the rate means.
Rates vary by sector and location. Finance and central London pay above the market — see the UK finance jobs guide.
Public sector work is frequently inside IR35 following the earlier reforms there.
On your CV, label contracts clearly with duration so short tenures read as intentional — see the UK CV format guide.
Common Mistakes
Comparing a day rate to a salary by multiplying by 260. You bill perhaps 220 days after holiday, bank holidays and gaps, and you fund your own pension, insurance and sick leave.
Ignoring the IR35 status line in an advert. The same rate produces very different take-home inside versus outside, so status changes what the number means entirely.
Assuming the contract wording determines status. Status follows the reality of the engagement, and a substitution clause that would never be honoured carries no weight.
Not checking what an umbrella deducts. Employer National Insurance and the apprenticeship levy are often taken from the assignment rate before your pay is calculated.
Missing rolled-up holiday pay. If holiday is included in the rate, the headline figure overstates what you actually earn per day worked.
Using a scheme promising unusually high take-home. Loan and offshore arrangements have produced large retrospective tax bills for many contractors.
Forgetting gaps between contracts. This is the single most underestimated cost and the main reason day-rate arithmetic misleads.
Leaving contracts unlabelled on a CV. Without durations marked, a series of short engagements reads as instability rather than as deliberate contracting.
Frequently Asked Questions
What does IR35 actually test?
Whether an engagement would look like employment if the intermediary company were removed. Control, right of substitution and mutuality of obligation are the dominant factors.
Who decides my IR35 status?
For medium and large private sector clients and the public sector, the client determines it and issues a Status Determination Statement. Small companies are exempt, leaving the contractor's own company responsible.
What is the difference in take-home?
Substantial. Outside IR35 you pay yourself through a limited company with salary and dividends; inside, income is taxed broadly as employment. The same rate produces materially different net pay.
What is an umbrella company?
A company that employs you and payrolls inside-IR35 assignments. Check its margin and, importantly, whether employer National Insurance is deducted from the assignment rate.
Are high take-home schemes safe?
Treat them as a warning sign. Loan-based and offshore arrangements have left many contractors facing large retrospective tax demands.
How do I compare a day rate to a salary?
Assume around 44 billable weeks rather than 52, then subtract pension, insurance, accountancy and training. Compare that with the salary plus employer pension.
Is contracting bad for my CV?
No, provided you label each engagement as a contract with its duration so the pattern reads as deliberate rather than as short tenures.
Check your CV before applying. Check your ATS score free.
Make This Practical
Read the IR35 status before the rate in any advert, because the same day rate produces materially different take-home inside and outside. A strong-looking inside-IR35 rate can be worse than the equivalent salary.
Then do the real arithmetic. Assume roughly 44 billable weeks rather than 52, subtract pension, insurance, accountancy and training, and compare against the salary plus employer pension — contracting often still wins, but by less than raw multiplication suggests.
Finally, protect yourself on the mechanics. Check exactly what an umbrella deducts and whether employer National Insurance comes off the assignment rate, avoid any scheme promising unusually high take-home, get an accountant before setting up a limited company, and label every contract with its duration on your CV.
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