Take-Home Pay Considerations for Limited Companies Under IR35
Take-Home Pay Considerations for Limited Companies
If you're a contractor or freelancer working through a limited company - or if you're a contractor or freelancer who's considering setting up a limited company - the introduction of IR35 legislation can significantly change your income. It's not the case of missing out on a few pennies or pounds here and there, the take-home pay differences between working inside or outside IR35 quickly add up, leaving you significantly better or worse off depending on where your contracting falls.
At
Go Limited, we've seen firsthand how setting up a limited company can be a tax-efficient way to operate, and how IR35 impacts how much of your income you actually keep. We also know that IR35 legislation can be difficult to get your head around, which is why we're here to help.
Limited Company IR35: What Does it Mean?
To truly understand the take-home pay considerations for limited companies under IR35, you need to familiarise yourself with IR35 and what it means. IR35 is a tax legislation introduced by HMRC, with the aim of identifying contractors who are working as employees, despite charging clients as a limited company. A lot of people make the mistake of assuming that setting up your own limited company means you're automatically self-employed, but that's not always the case. In some circumstances, you're still considered an employee, which means that your take-home pay is treated as such.
The goal of IR35 is to close a commonly used tax loophole, in a bid to ensure that contractors doing similar work as employees pay a similar amount of tax. It's there to stop contractors who are working as employees to benefit from reduced tax liabilities and increased take-home pay. Under IR35, a contractor is assessed to determine whether or not the work is employment or self-employment. If it is employment, the contract is deemed 'inside IR35', and the contractor is taxed as if they are an employee.
The Difference Between Inside and Outside IR35 Through a Limited Company
Knowing the difference between working inside and outside IR35 is key, as the status of your contract has a direct impact on how you are treated for tax purposes and how much of your hard-earned income you get to take home.
- Working Inside IR35 - When your contract is inside IR35, you're considered an employee for tax purposes. Even though you're still operating through your limited company, you're treated in the same way as standard employees. This means the client, recruitment agency or umbrella company that you're working with deducts Income Tax and National Insurance Contributions (NICs) before paying you. This simplifies your take-home pay, but it does mean you lose access to most of the tax efficiencies that come with operating through a limited company, such as claiming limited company allowable expenses.
- Working Outside IR35 - If your contract is outside IR35, you are treated as a genuine business that's providing services to another business. You invoice your client through your limited company and they pay you, and then you handle the tax and NICs side of things yourself. You have the freedom to choose how to structure your income - for a lot of contractors, this means being paid a small salary and making the rest up in dividends, which are taxed at a lower rate - and you have the power to claim a wide variety of business expenses. As a limited company contractor working outside IR35, you have full control over your finances and how you run your business.
Does IR35 Change Limited Company Take-Home Pay?
Yes, IR35 does change limited company take-home pay, and the difference between being inside or outside IR35 rules can be substantial. When you're working outside IR35, your limited company is treated as a business that's providing services to another business. You invoice your clients directly and once your business receives payment, you have the flexibility to structure your income in a tax-efficient way.
Limited Company Wages
When you work outside IR35, you can split your income to make it as tax-efficient as possible. The majority of limited company contractors choose to take a low salary - as this reduces the amount of income tax and NICs that need to be paid - and make the rest up in dividends. These are taxed at a lower rate, keeping more of your income in your pocket. This setup maximises take-home pay while remaining compliant.
This option isn't available if you'reworking inside IR35, as you're typically paid a fixed rate through your agency, umbrella company or client. You're treated as an employee, which means that your payment is subject to full PAYE deductions. You can't split salary and dividends, and you're taxed like an employee, without allowable expenses being taken into account.
Limited Company Allowable Expenses
One of the biggest benefits that come with being a freelancer, contractor or self-employed professional is the allowable expenses that can be claimed. When you're working outside IR35, you can deduct legitimate business expenses from your income before tax, including office costs - such as home office costs, equipment, software and supplies - travel, training courses related to your professional, business insurance, accountancy, administrative costs and industry subscriptions.
But, if you're a contractor working inside IR35, you don't have this luxury. There are a few exceptions, but most contractors working inside IR35 aren't able to claim allowable expenses, which means you're unable to minimise your tax liabilities and maximise your take-home pay in the same way.
Thinking About Setting Up Your Own Limited Company?
If you're thinking about moving into contracting or freelancing, or you're already contracting but you're thinking about setting up a limited company, you'll be pleased to know it's often seen as the ideal route to take. This is especially true if you expect to work outside IR35 for the majority of your contracts, with very little falling inside the rules. This is because setting up your own limited company has a whole host of benefits, such as boosted take-home pay, professional credibility and autonomy.
Maximising Your Take-Home Pay
One of the main benefits of choosing the limited company route is the ability to structure your income in a tax-efficient way. Outside IR35, you can pay yourself a small salary and draw the rest of your income as dividends, which are taxed at a lower rate than standard income. This strategy - when combined with the ability to claim allowable business expenses - allows you to retain more of what you earn, compared to if you were taxed under PAYE rules. These savings quickly add up, maximising your take-home pay and ensuring you keep as much of your earnings as possible. You can then use this as disposable income, to increase savings or to invest back into the business.
Freedom and Flexibility
Running your own company means you're in control. You choose the contracts you take, how you work, when you work, and what clients you partner with. There's no employer dictating your hours, and you can run your business in a way that suits your lifestyle. This could mean working full-time, part-time or taking on short-term projects. This kind of flexibility is one of the biggest reasons people move into contracting in the first place, and operating through a limited company is the most straightforward way to make the most of that flexibility and freedom.
You're Your Own Boss
Setting up a limited company gives you full control over your business decisions, putting you in the driving seat of your career. You're able to manage your finances, your branding and your professional growth. You can hire others if you need to, invest in the tools and systems you enjoy using, and even scale up if the opportunity arises. This autonomy not only helps you to operate in your own way, without having to answer to anyone else, but it also impresses clients. Clients are more likely to treat you as a true business partner, rather than a temporary resource or employee.
It Looks Professional
There's a lot of competition out there, and looking professional is key if you want to be the 'go to' for clients looking for services in your industry. If you've set up your own limited company, you're showing clients that you take your job seriously. It gives you a more professional appearance and shows that you operate as a legitimate business, not just someone who casually freelances on the weekend or on a part-time basis. This can open doors to higher-value contracts and clients who prefer to work with full-time, reliable professionals. Contracting has become part of the norm in many industries, and setting up a limited company can help you to stand out from the competition.
At Go Limited, we encourage contractors to familiarise themselves with the ins and outs of IR35, because the route you take can hugely change how much you earn. This is why a growing number of contractors are setting up a limited company, giving themselves the freedom to maximise their take-home pay and make the most of tax-efficiency.
Frequently Asked Questions: Take-Home Pay for Limited Companies Under IR35
1. What does IR35 mean for contractors?
IR35 represents UK tax regulations that target disguised employment through the implementation of off-payroll working rules. The legislation applies to situations where service provision by a contractor happens through an intermediary entity like a PSC when direct engagement would classify them as an employee. When a contractor works under IR35 rules, they must pay Income Tax and National Insurance Contributions as employees do which in turn diminishes the financial benefits of running through a limited company.
2. What is the process of determining net income for contractors operating under IR35 contracts?
Contractors working within IR35 classifications receive their payments as employment income. The client or agency acting as the deemed employer makes deductions for Income Tax and employee National Insurance Contributions (NICs) from the contractor's earnings. Employer National Insurance Contributions alongside any relevant Apprenticeship Levy payments are submitted to HMRC. After deductions contractors under IR35 receive the remaining net pay which ends up being less than the pay contractors receive outside IR35 arrangements.
3. How does tax treatment differ for contracts that fall outside IR35 status?
When contractors work outside IR35 they function as real businesses with their own operational structure. Contractors outside IR35 may choose to receive their remuneration through a low salary and dividends because this method offers better tax efficiency. A common financial strategy involves receiving a salary up to the NIC threshold such as £9,100 while taking the remaining payments as dividends which benefit from lower taxation rates. This arrangement provides contractors with greater net income than when operating under inside IR35 terms.
4. Is it possible to continue working through my limited company when operating inside IR35?
Operating through your limited company remains possible when a contract falls under IR35. The contract income should be taxed as employment income with proper tax and NIC deductions applied which means this may not be as tax beneficial.
5. How does IR35 status affect pension contributions?
Your limited company can deduct employer pension contributions from outside IR35 contracts as business expenses which reduces Corporation Tax liability. These contributions are not subject to NICs. Although pension contributions can be made for inside IR35 engagements, tax benefits may vary, so financial advisors should be consulted to comprehend the full implications.
6. Can I use the 5% allowance and how does it affect my particular situation?
Contractors operating within IR35 used to deduct 5% of their total income as administrative expenses. The 5% allowance was eliminated in April 2017 for public sector contracts and in April 2021 for medium and large private sector clients. The allowance persists solely when the final client qualifies as a small business based on the Companies Act 2006 standards.
7. How to determine if you are inside or outside IR35?
The assessment of your working relationship with the client determines IR35 status. The IR35 status depends heavily on three elements: client control over work execution, ability to send a substitute worker, and mutual employment obligations. HMRC offers the Check Employment Status for Tax (CEST) tool to help with IR35 status determination yet professional advice usually proves beneficial because of the complicated regulations.
8. How do financial outcomes differ between IR35 compliant and non-compliant contracts?
Working under IR35 will decrease your net income because of elevated tax and National Insurance charges. When working within IR35 regulations, a contractor who earns £500 each day takes home roughly £64,019 annually versus £72,390 outside IR35 given a standard work schedule of 44 weeks per year plus typical expenses. Individual circumstances lead to different exact figures.
9. Is it permissible to hold multiple contracts where some qualify as inside IR35 and others as outside IR35 at the same time?
Contractors can maintain several contracts where some fall inside IR35 while others remain outside IR35. Each contract must be assessed individually. Treat income from inside IR35 contracts as employment revenue subject to tax deductions while handling outside IR35 contract income through your limited company to achieve better tax efficiency. Maintaining accurate records and adhering to compliance standards is critical in these situations.
10. How can I optimise my net income when working under IR35 regulations?
For outside IR35 contracts:
1. Achieve diverse income structuring by blending salary payments with dividend distributions.
2. Use your limited company to fund employer pension contributions.
3. Submitting valid business expenses can help decrease your taxable income.
For inside IR35 contracts:
1. Seek higher contract rates to balance out the financial impact of increased tax liabilities.
2. Evaluate whether working through an umbrella company could result in improved financial returns.
3. Consistently evaluate contracts and working practices to maintain proper IR35 status assessments.
4. A professional accountant or tax advisor can develop strategies that help you improve your net earnings while complying with IR35 rules.
Important:
Please note: Any rates and thresholds mentioned in this article are correct at the time of publishing and may be subject to change.
When choosing an accountant, look for one with proven experience and expertise in the contracting sector, particularly around areas like IR35, limited company tax matters and off-payroll working. Formal qualifications are important, but relevant hands-on knowledge matters just as much — especially in a complex and fast-changing landscape like this.
