IR35 Calculator UK 2026/27

What is IR35?

IR35 is HMRC’s anti-avoidance legislation designed to tax “disguised employees” — contractors who work like employees but operate through a limited company to pay less tax. The rules have existed since 2000, but the “off-payroll working rules” reformed in April 2021 shifted the responsibility for determining IR35 status from the contractor to the end client (for medium and large businesses).

If your contract is outside IR35, you’re considered genuinely self-employed. You can pay yourself a tax-efficient salary through your Ltd company and extract remaining profits as dividends, which are taxed at lower rates than employment income.

If your contract is inside IR35, HMRC considers you a “deemed employee” for tax purposes. Your income is subject to full income tax and National Insurance, similar to a permanent employee, even though you work through a company. You do get a 5% flat-rate expense deduction.

IR35 status is determined by the end client (not you) using factors like control, substitution rights, and mutuality of obligation. HMRC’s CEST tool provides an indicative assessment, though its accuracy has been disputed.

Related: Salary sacrifice calculator | Contractor budgeting guide

Ltd company vs umbrella — which is better?

Ltd company (outside IR35) gives you the highest take-home pay. You control when and how you extract profits — typically a small salary at the personal allowance threshold plus dividends. Corporation tax is 19–25%, and dividends are taxed at 8.75–39.35%, but the combined rate is still lower than employment income tax plus NI. You can also claim business expenses, make employer pension contributions, and build retained profits in the company.

Umbrella company is the simplest option. You become an employee of the umbrella, who invoices the agency on your behalf. They deduct their margin, employer NI, and then pay you via PAYE. Take-home is slightly less than inside IR35 due to the margin, but there’s zero admin — no company accounts, no VAT, no self-assessment.

When an umbrella makes sense: Short contracts (under 3 months), your first contract while setting up a Ltd, or if you simply want zero administrative burden. Many contractors use an umbrella for inside IR35 contracts and their Ltd for outside IR35 work.

When Ltd company wins: Any outside IR35 contract, longer engagements, higher day rates, or when you want to retain profits in the company for future use. The tax savings compound significantly over time.

How to reduce your IR35 tax bill

Pension contributions via salary sacrifice. Whether outside or inside IR35, pension contributions are one of the most effective ways to reduce your tax bill. Outside IR35, your Ltd company can make employer pension contributions that are fully deductible against corporation tax and free from personal income tax and NI. Inside IR35, salary sacrifice pension contributions reduce your deemed payment, saving both income tax and NI. Use our salary sacrifice calculator to see the impact.

Claim all allowable expenses. Outside IR35, claim everything you’re entitled to: accountancy fees (typically £1,000–£2,000/year), professional indemnity insurance, co-working space, software subscriptions, training courses relevant to your work, and travel to temporary workplaces. Inside IR35, you get the 5% flat-rate deduction instead.

Optimise your salary/dividend split. Outside IR35, the most tax-efficient strategy in 2026/27 is typically a salary of £12,570 (the personal allowance) and the rest as dividends. If you have no other employment income, this means zero income tax and zero NI on the salary portion. Dividends are then taxed at 8.75% (basic rate) up to the basic rate band, then 33.75% above.

Use your £500 dividend allowance. The first £500 of dividends are tax-free each year. If your partner is also a shareholder (and does genuine work for the company), they can use their allowance too.

Track contractor income in earmarkIQ

earmarkIQ handles irregular income automatically — whether you invoice monthly or have gaps between contracts. Connect your business and personal accounts via Open Banking, and earmarkIQ’s AI will detect your invoicing patterns, calculate your effective tax position, and help you plan for tax bills before they arrive.

Features for contractors: automatic income detection across multiple accounts, corporation tax and dividend tax estimates, IR35 income categorisation, quarterly tax bill forecasting, and an AI advisor that understands contractor finances.

Related: Freelancer budgeting guide | Best budgeting apps UK 2026