In this article I’ll share my own IR35 contractor calculator and provide you with IR35 Inside / Outside comparison.
The information I provide is best to my knowledge for UK financial year 2020/21.
IR35 Inside and Outside
The biggest difference in IR35 is what kind of tax you pay and the total amount you pay.
In our contractor calculator you can switch between Inside and Outside IR35 using these buttons.
For Inside IR35 you are treated as a normal employee and therefore you will pay the same tax as all permanent employees in UK, however bear in mind that what you get from a client needs to also include 13.8% Employer’s National Insurance which is on top of your salary. For instance, in most cases, if someone gets £75,000 a year that amounts includes 13.8% so actual salary is £65,905 + £9.095 Employers’ NI.
For Outside IR35 you can pay yourself dividends, so typically you pay yourself a salary of £8,750 (for 20/21) or slightly higher, which mean you qualify for state pension years and after calculating profit (revenue – expenses incl. salary) you pay 19% corporation tax and you take out the profit as dividends after paying dividend tax. Using dividends is more tax effective comparing to paying yourself higher salary.
At this point you may want to try our IR35 contractor calculator and check what is the difference in take home between Inside and Outside IR35.
5% allowable expenses (inside IR35)
For Inside IR35 there is 5% allowable expenses which applies only if 1) you work for private sector 2) You operate using PSC/LTD company (not Umbrella), and apparently if you don’t have any expenses (accounting, payroll etc.) you will pay corporation tax on 5% allowable expenses.
We have seen other IR35 calculators that include 5% allowable expenses but the issue we found is that you cannot remove it, so the calculated take home is higher than what it should be, for cases where it doesn’t apply, which is most of them.
In our calculator we decided to exclude this option as most contractors Inside IR35 will not quality for it, as they will typically use Umbrella company or work for public sector, however we have option of specifying expenses so you can manually add it. The only thing it’s not going to do is calculate corporation tax, however the impact is very low between 0% and 1%.
Expenses and non claimable expenses.
One of the bigger factors for take home pay are expenses, as for some contractors travel / accommodation costs can be significant.
For Outside IR35 you typically can claim most business related expenses and that means you don’t pay tax on expenses and if you are VAT registered you can claim on VAT (Standard VAT not Flat Rate Scheme).
For Inside IR35 minority of contractors will qualify for 5% allowable expenses, but apart from that you cannot really claim expenses on travel / accommodation.
Expenses can play a big part in take home or when comparing Inside and Outside IR35 so in our calculator we have added two options, as you can see on the image below.
First, we have expenses which are claimable expenses, typically outside IR35, and then we have non claimable expenses which typically apply to Inside IR35.
We have included non claimable expenses for two reasons. One, it can be significant amount, and second it affects directly take home for instance if you have £5k train expenses a year than in most cases you have to earn twice as much before you take home £5k.
In our calculator we also include Bench Time which is the amount of time you spend not being paid, which is typically time between contractors. This, of course applies to both Inside and Outside IR35 contractors in UK.
What is the difference in Tak home?
For most contractors the take home difference between Inside and Outside IR35 is between £7,000 to £10,000 and can be higher for Inside IR35 if you have a lot of non claimable expenses.
Also bear in mind that you need to earn almost £20,000 more to take home £10,000.
To get a more accurate comparison please use our IR35 contractor calculator.