What IR35 Legislation Means for Limited Company Contractors

HMRC created IR35 legislation as a way to find workers who are disguising their employment. This means people who provide services through a limited company, but work under conditions similar to that of a permanent employee. For example, you might be trading through your own business as a limited company contractor, but you’re still an employee in the eyes of HMRC. 

The goal of IR35 is to ensure everything is fair between employees and contractors carrying out the same kind of work. If your working arrangement is similar to employment - such as being controlled by a manager or supervisor, or you're fully integrated into a client's team - HMRC are likely to classify you as working inside IR35. This changes the way you’re taxed, big time.

Contracting Inside vs Outside IR35: What Does it Mean for Your Take-Home Pay?

To truly comprehend what IR35 means for your take-home pay, you need to understand the difference between working inside and outside the legislation.

Inside IR35 - You’re Taxed Like an Employee

When a contract falls inside IR35, you are taxed as if you were an employee of the client, rather than a third-party contractor. This is the case even if you’re invoicing through a limited company. This means your income tax and National Insurance are deducted at the source, usually by an umbrella company or the client themselves.

• You lose access to most of the tax efficiencies that come with limited company status.
• You can’t claim most allowable business expenses, though there are a few exceptions.
• Your payments are made via PAYE, giving you less flexibility in how your income is structured.

This means that your take-home pay is reduced if you’re working inside IR35, and the benefits of running a limited company dwindle.

Outside IR35 - You Get Freedom and Tax Efficiency

When a contract falls outside IR35, you're treated as a genuine business providing services, not as an employee. You aren’t considered to be employed by the client you’re working for, and you’re seen as a completely flexible, independent business. You handle your income tax and National Insurance yourself, as they’re not taxed at the source.

• You can invoice clients through your limited company and pay yourself a salary and dividends.
• Dividends are taxed at a lower rate than salary, making this a more tax-efficient way to earn money.
• You can claim legitimate business expenses - like travel, equipment, insurance and software - which help you to reduce your tax liability.
• You maintain full financial control and flexibility, without having to think about anyone else’s input.

This means that working outside IR35 can boost your income, especially when combined with financial planning, dividends and expert advice.

The Cost-Effective Way to Contract: How Take-Home Pay Differs Under IR35

The difference between working inside and outside IR35 can be significant, especially when it comes to your take-home pay. Outside IR35, you benefit from lower personal tax liability - which is achieved through dividend payments - allowable expense deductions that lower your overall taxable profits, and increased control over income decisions.

Inside IR35, your income is taxed before it reaches your limited company, eliminating most of these advantages and taking away that control. You don’t get a say over how or when you’re paid, or what’s deducted at the source. You’re paid like an employee, but you still have the compliance and reporting obligations of running your own limited company. This often leads to higher admin burden, but with fewer financial rewards. 

Income Structuring and Your Wages: What You Need to Know

Though the exact difference in take-home pay will depend on your earnings, here’s the key thing to remember when you’re deciding whether to set up a limited company under IR35: 

• When working outside IR35, contractors tend to use a blend of salary and dividends. The salary is kept low - often at or just above the National Insurance threshold - while the majority of the income is taken as dividends. It's a compliant and strategic way to boost take-home pay.
• When working inside IR35, your income is subject to full PAYE deductions. You’re treated as a traditional employee from a tax point of view. This means no dividend income, no flexibility in structuring pay, higher deductions at source, and limited allowable expense claims.

Claiming Business Expenses Under IR35: Who Can and Who Can’t Claim Allowable Expenses

If you’re an outside IR35 contractor, you can deduct a wide range of allowable expenses, such as equipment and software, home office costs, business travel and accommodation, training - as long as it’s related to your work or industry - accountancy services, insurance and industry subscriptions. These deductions reduce your taxable profit, increasing what you can take as dividends or reinvest into your business.

If you’re working inside IR35, you lose most of these allowable expense benefits. As your income is taxed before it reaches your business, you can't offset it with typical business expenses. You might spend money on the same things, but you can’t use them to your advantage. This further reduces your earnings and makes limited company contracting less appealing.

Are You Thinking About Setting Up a Limited Company Under IR35?

If you’re thinking about setting up a limited company under IR35, you’re not alone. If most of your contracts fall outside IR35, it’s a powerful move that’s likely to boost your take-home pay and drive your business forward. It gives you more control, access to tax efficiencies and the ability to grow your brand as a fully fledged business, rather than just a solo freelancer. But, if the majority of your work is inside IR35, it’s worth weighing up the pros and cons of setting up a limited company. 

• You might find that the administrative effort, paperwork responsibilities and costs are worth the reduced benefits. 
• You might also find that not setting up a limited company, and working with an umbrella company or staying as a sole trader works best. 



Think about the advantages and disadvantages of setting up a limited company in relation to the specific projects you handle, the clients you work with and your take-home pay, and use this information to find the ideal route for your business.

The Take-Home Pay Advantage of Operating Through a Limited Company Under IR35

When structured correctly and operating outside IR35, a limited company lets you:

• Maximise your take-home pay through dividends.
• Reduce your tax liabilities via allowable expense claims.
• Gain control of when and how you take your income.
• Reinvest profits back into your business to grow your brand.
• Build long-term financial security in a way that works for you, on your own terms.

These advantages aren’t available if you’re taxed under PAYE from working inside IR35, making your IR35 status one of the most important financial factors in your contracting career. If you get things wrong, you could end up missing out on boosted take-home pay, or with more admin than you’re comfortable handling.

Control, Flexibility and Professional Presence

Running your own limited company gives you full control over your working life. You choose your clients, set your rates, define your working hours and run your business in a way that works for you, including striking your ideal work-life balance. You’re not just a contractor, you’re a business owner.

This independence appeals to many clients too, which is why setting up a limited company can help you to secure contracts. Presenting yourself as a company often increases your professional credibility, helping you to win more valuable and long-term contracts. Clients see you as a partner and long-term contractor, not just a temp that’s likely to disappear when they get bored of contracting.

Are You Ready to Navigate IR35 with Confidence?

At Go Limited, we help contractors make informed decisions about how they work. Whether you’re just getting started as a contractor or you’re rethinking your current setup, it’s important to understand how IR35 affects your income. If most of your roles fall outside IR35 and you’re ready to manage a business, setting up a limited company can be a financially rewarding and empowering move. Knowing the impact of IR35 on your take-home pay is vital, and we're here to guide you every step of the way.