How Much Do Contractors Really Get Paid? | Inside Vs Outside

Introduction

This article talks about how contracting can be financially rewarding, but it comes with a unique set of rules—especially when it comes to how your pay is taxed. Whether you’re working Inside IR35 or Outside IR35, both directly impacts your take-home pay, taxes, and financial planning.

In this article, I’ll break down the key differences between these two classifications and reveal how you can maximize your earnings, protect your income, and make contracting work best for you.

1. Inside IR35 and Outside IR35

Inside IR35 means you’re taxed like an employee. HMRC sees your work as similar to permanent employment, which brings higher taxes. Think of it as working on fixed contracts where the end-client sets expectations similar to a full-time role.

Outside IR35 lets you operate as a separate business. Here, your work is seen as independent, such as a one-off project or specialist service. This classification allows greater tax efficiency with more deductible expenses and dividend options.

How Pay & Taxes Differ Inside IR35

If you’re inside IR35, you’ll likely be paid via an umbrella company, which processes your pay after deducting income tax (PAYE), employee National Insurance (NICs), and umbrella fees.

Breakdown of Deductions:

Employer NICs (currently 13.8% and soon to be 15% from the 1st of April 2025) and Apprenticeship Levy (0.5%) – Covered by your employer but added to the cost of your service.
Employee Taxes and NICs – PAYE income tax, NICs, and potential pension contributions directly reduce your earnings taken from your gross taxable pay.

The Inside IR35 Day Rate Example

I’m now going to compare what £500 a day looks like if you were working inside IR35 vs outside IR35.

Let’s say you earn a £500 daily rate as a contractor working inside IR35. By the time umbrella fees, employer contributions, and employee taxes are taken off, your take-home pay drops significantly. You may see roughly £264 a day after all deductions—a significant reduction from your gross earnings.

The diagrams below calculations that pertain to:

What affects the contractors pay
What the client organisation needs to pay
The calculations

2. Outside IR35 Pay & Taxes – A Different Set of Rules

As suggested before, Outside IR35 offers greater freedom with your pay processed through a Limited Company. You invoice the client and pay corporation tax on your profits, allowing you to benefit from lower tax rates on dividends.

Dividends tax, also known as personal tax is taken into consideration everytime you make a bank transfer from your business account to your personal account. It’s important to record your activity and take into consideration how much you owe in dividends each time you withdraw (I was always told by my accountant to keep aside 10% per transfer).

When it comes to Business Expense Allowances you have the ability to deduct it from your profits, thereby lowering your tax contributions when the calculations are made. Think about technology, software, travel, equipment, and other allowable expenses that could be accounted for helping you reduce your tax obligations.

Below shows the following information:

Taxes paid by the outside IR35 contractor paying themselves dividends
A working example of their monthly pay under conditions (read more below)

So What Makes More?

Assuming both an Inside IR35 contractor and an Outside IR35 contractor work 20 days at £500 a day, here’s how the numbers stack up after deductions:

Inside IR35: £5,286.20
Outside IR35: £6,723.60

That’s a difference of £1,437.20 in favour of working Outside IR35.

Please note I am not an accountant or finance professional. Please always seek a professional. If you would like a recommendation please do reply back to this email

Key Takeaways

Inside IR35: Your pay undergoes higher tax deductions, making it similar to traditional employment. Umbrella companies handle the administration but at a cost.
Outside IR35: You benefit from tax efficiencies, as your Limited Company lets you claim business expenses, pay less tax on dividends, and keep more of what you earn.
Expense Management: Knowing what you can and can’t claim as an expense is essential to maximising your take-home pay.
Administration Needs: Outside IR35 offers more financial flexibility but requires proper bookkeeping and tax management, typically through an accountant.

Conclusion

Understanding how IR35 impacts your pay is essential to making contracting work for you. Inside IR35 has its conveniences in terms of less paper work, but takes a larger chunk of your income through taxes.

Outside IR35, while more administratively demanding, allows you to keep more of what you earn and enjoy tax efficiencies provided you get good counsel from an experienced accountant. Make informed choices about your contracts, understand your tax obligations, and maximise the benefits of your contracting career.

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Book a call: Let’s have a chat to focus on your life areas and where you can have the biggest impact. If it makes sense, we can progress towards procuring coaching or mentoring.