IR35 for UK Contractors: Complete Guide 2026/27

IR35 (also known as the off-payroll working rules) is a set of UK tax laws introduced in 1999 and significantly reformed in 2017 (public sector) and 2021 (private sector). The legislation is designed to prevent what HMRC calls “disguised employment” — situations where a contractor works through their own limited company but operates in practice like a permanent employee, paying less tax and National Insurance than an equivalent direct employee.

Under IR35, the responsibility for determining whether the rules apply sits with the end client (for medium and large private sector clients and all public sector bodies). The client issues a Status Determination Statement (SDS) that sets out whether the contractor is inside or outside IR35. If inside, the fee-payer (agency or client) must deduct income tax and National Insurance through PAYE before paying the contractor.

For the 2026/27 tax year, the key IR35 rates that every contractor needs to understand are: employer NI at 15% on earnings above £5,000, employee NI at 8% and 2%, income tax at progressive rates (20%, 40%, 45% or Scotland’s five bands), and the apprenticeship levy at 0.5%. These rates directly determine how much of your contract income you actually take home.

Your IR35 status determines how your income is taxed and how much you ultimately take home. The difference between inside and outside IR35 can be £15,000–£25,000 per year for a typical senior contractor on £650/day.

Inside IR35 means HMRC treats you as a deemed employee. Your contract income is processed through PAYE, meaning you pay income tax, employee National Insurance, and crucially, employer National Insurance at 15% is deducted from your contract value before you receive any pay. You cannot claim travel and subsistence expenses, and you lose the ability to optimise your income through dividends. Your take-home pay is typically 20–30% lower than an equivalent outside IR35 contract.

Outside IR35 means HMRC accepts you as a genuine business operating through your own limited company. You invoice for your services, pay corporation tax on your profits (19–25%), and extract income via a combination of salary and dividends taxed at lower dividend tax rates (8.75%, 33.75%, or 39.35%). You can claim legitimate business expenses and benefit from more flexible pension planning.

The 2021 off-payroll working reforms placed the determination responsibility on clients, meaning contractors have less control over their IR35 status than in the past. Many contractors now negotiate day rate uplifts when accepting inside IR35 contracts to compensate for the additional tax burden.

When you work inside IR35, your income is calculated through what HMRC calls the “deemed employment” calculation. This starts with your gross contract income (your day rate multiplied by the number of days you work) and applies a series of deductions in a specific order:

Step 1 — Gross income: Your total contract value. For a contractor on £650/day working 5 days per week for 46 weeks per year, this is £149,500.

Step 2 — Employer NI: At 15% on earnings above £5,000 for 2026/27, this is the single largest deduction. On £149,500, employer NI amounts to approximately £21,675. This is deducted from your contract value before any other calculations.

Step 3 — Apprenticeship levy: 0.5% of the total pay bill. On £149,500, this is £748. While the levy technically applies to employers with a pay bill over £3 million, inside IR35 arrangements commonly pass through an equivalent charge.

Step 4 — Pension contributions: If you opt into a salary sacrifice pension, your contribution (typically 5% of gross) is deducted before income tax and NI, reducing your overall tax liability. On £149,500, a 5% contribution is £7,475.

Step 5 — Income tax: Applied to your remaining income after pension deductions, at progressive rates. For England and Wales: 20% on £12,571–£50,270, 40% on £50,271–£125,140, and 45% above £125,140. Scotland uses five bands with rates ranging from 19% to 48%.

Step 6 — Employee NI: 8% on earnings between £12,570 and £50,270 and 2% on everything above £50,270.

Step 7 — Student loan: 9% of earnings above your plan’s threshold (Plan 1: £24,375, Plan 2: £27,295, Plan 4: £31,395, Plan 5: £25,000).

The result is your net annual take-home pay. Use our Inside IR35 Calculator to run this calculation with your exact numbers.

The 2026/27 tax year introduced several changes that directly affect IR35 contractors. The most significant is the employer NI rate, which increased from 13.8% to 15% following the 2024 Budget. This single change adds approximately £1,800 to the tax burden of a contractor earning £149,500 gross inside IR35.

Key rates for 2026/27:

• Personal allowance: £12,570 (same as 2025/26)
• Basic rate (20%): £12,571–£50,270
• Higher rate (40%): £50,271–£125,140
• Additional rate (45%): Over £125,140
• Employer NI: 15% on earnings above £5,000 (increased from 13.8%)
• Employee NI: 8% on £12,570–£50,270, 2% above £50,270
• Apprenticeship levy: 0.5% of total pay bill
• Scottish Starter rate (19%): £12,571–£14,876
• Scottish Basic rate (20%): £14,877–£26,561
• Scottish Intermediate rate (21%): £26,562–£43,662
• Scottish Higher rate (42%): £43,663–£75,000
• Scottish Top rate (48%): Over £75,000

For contractors operating outside IR35 through a limited company, the corporation tax rates remain at 19% for profits under £50,000, with marginal relief up to 25% for profits over £250,000. Dividend tax rates are 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate), with a £500 dividend allowance.

Scottish contractors face a particularly complex situation inside IR35 because the five-band system means more of their income falls into higher marginal rates. Use our Scotland IR35 Calculator to see the exact impact.