I’m frequently asked this question by self-employed contractors since the IR35 reforms in April last year.
In truth, the only person that can really answer the question is the contractor themself, each and every individual’s circumstances are different. In my view, it’s difficult to make a strong case for working inside IR35 vs permanent roles. However, for the purposes of this article I’ll offer my perspective looking at the options objectively. I’ll also offer a glimmer of hope for those that are considering leaving contracting for permanent roles.
N.B. This article is only relevant if you’ve historically worked as a contractor outside IR35 and, since the April 2021 reforms, have found the majority of your opportunities now falling inside IR35, as companies struggle to get to grips with the change. If, however you’ve built a career working in roles that have always been inside IR45, via PAYE, then you’re unaffected.
I’m going to take a Q&A approach, offering my thoughts to the regular questions asked.
I’ve historically worked outside IR35 for many years, will taking inside IR35 roles invite unwanted attention from HMRC?
No one really knows for sure how the HMRC machine works, but looking at the facts I would say it’s quite possible. I’ve 17 years legal experience in IR35, personally managed over 100 HMRC IR35 enquiries for clients, I’m aware they’ll look for any avenues they can.
They have recently been given an additional £161m compliance funding, given the expense of Covid, they will be tasked with identifying any scope for tax recovery.
HMRC have the legal right to review your contracts going back 6 years, it is possible that moving inside IR35 via PAYE will raise flags as to why historically you’ve been assessed outside IR35. That said, if you were correctly assessed outside IR35 in previous years, there is no reason to feel uncomfortable.
What is the % difference of my net income inside vs outside IR35?
The increase in your take home outside IR35 (vs Inside) could range from 8% to as high as over 30%, dependent on a number of factors, I’ll address them in turn. Let’s take a typical £500/day contractor.
- Assuming the gross day rate is the same inside IR35 vs outside IR35 (e.g £500/day) you’ll earn around 8% more outside IR35 (c.£480/month). This is assuming you operate your Ltd company tax efficiently (e.g. low salary, dividends).
- If the Employer asks you to go via an Umbrella, absorbing their Employer Taxes (over 15%) within your PAYE day rate, that’ll increase the difference dramatically. This puts the take home advantages of an outside IR35 opportunity at closer to 27%.
- The gap gets even wider when you factor in expenses. Commuting is very expensive, if you are inside IR35 it’ll come out of your net pay, if you’re outside IR35 you can offset these costs via your Ltd company as expenses, reducing your tax burden.
- Finally, distribution of income. For a large number of contractors working via their ltd company, they’ve distributed their income between each spouse efficiently. This can make a huge difference, but this option is off the table for an inside IR35 contract.
What about a Pension for inside IR35 roles?
This is quite confusing for most, it’s also a little misrepresented. The reality is that employer pensions are not very attractive for contractors working inside IR35. There are two factors to consider:
- You won’t receive a workplace pension until you’ve completed 12 weeks at a client. For some contractors, they will likely move between clients and that doesn’t give them much time to earn pension contributions from them.
- You may have heard ‘3% workplace pension’ being mentioned. Don’t confuse this with a permanent person likely receiving 3% pension on their entire earnings, in reality a workplace pension has a threshold of ‘qualified earnings’ that limits the 3% client contribution to apply to a maximum of £847 earnings per week. Simply put, if you’re on £500/day, you’ll be earning £2,500 per week, yet your pension is only 3% of £847 (£25.41) payable from 12 weeks onwards with the client.
What other benefits and rights do I get working inside IR35 e.g. Holiday pay, sickness, holidays?
Given you have no employment rights working outside IR35, a fairer assessment is to analyse how an inside IR35 role compares to permanent employment. Inside IR35 roles do not stack up favourably in this space, most permanent employees enjoy enhanced pension, private healthcare, life insurance, significant sick pay, full maternity leave etc whilst is all a distant dream for a contractor working inside IR35.
- Holiday pay: is usually a work of fiction, it’s simple a case of a % of your pay being set aside (usually 12.07%) to cover the mandatory 20+8 days you are legally required to take. You are not being paid holiday pay on top.
- Sick pay: You’ll only be entitled to statutory sick pay (SSP) at £96.35 per week, claimable after 4 days of being off. Hardly worth it for a highly paid contractor.
Will you pass an HMRC IR35 enquiry?
Take our 5 minute online IR35 risk assessment to find out
HMRC’s soft landing period has ended and IR35 enquiries will soon begin in the private sector. Make sure you identify any risk areas and ensure you’re managing it correctly.

Should I go permanent, or is there hope for future roles outside IR35?
Since April 2021 reforms, according to IPSE 1/3rd of contractors have left the profession. This is an alarming statistic, in particular given the valuable contribution the flexible workforce makes to a prosperous economy. It’s also not sustainable, a point I’ll address in a moment.
I’ll answer the above question by splitting it into two sections:
Contracting inside IR35 VS permanent work
It’s difficult to make a case for contracting inside IR35 on a continued basis, when compared to taking a permanent role. Given all the insecurities of contracting, the need to find the next client, potential downtime between contracts, unless the take home pay is at least 25% higher than the contractor could secure permanently, it simply isn’t worth it.
It needs to compensate for the lack of pension, life insurance, private healthcare, plus inferior sick pay, holiday, share options, bonus schemes. There are plenty of benefits available to permanent staff in addition to the base pay that must be considered.
That’s not to say that an inside IR35 role can’t be a useful stop gap whilst waiting for the right opportunity, as I’ll come on to now
Important: Make sure the role is not misadvertised at the umbrella rate, subject to significant deductions for employers taxes and fees. Before you throw your hat in the ring, just be sure what your gross rate and net pay actually will be.
Be patient, companies will learn to adapt to working outside IR35
When I founded IR35 Pro, it was to help companies take advantage of the opportunity IR35 offers. In my experience, 75% of skilled contractor assignments can be structured outside IR35 compliantly, providing you have the depth of legal experience to know how to. Most companies don’t.
HMRC themselves state that 66% of contractors should be working outside IR35, unaffected by the April 2021 reforms. The reality is that companies are still in the ‘getting to grips with IR35’ phase, the actual number of assignments outside IR35 is way short of where it should be.
Many of IR35 Pro’s recent clients took initial blanket policy decisions on not using Limited company contractors in April 2021. 6 months later, the reality dawned of how unsustainable it is. They couldn’t find the skilled contractors, which lead to planes being grounded, ships not being built, important IT projects being delayed.
Companies are learning to adapt, that IR35 is not quite as scary as once feared, that there is help out there to embrace it. They need to lean on experts to help them do so compliantly, IR35 is an opportunity for forward thinking companies to create a real competitive advantage.
If you can ride the storm and be patient, in 12 months from now the contracting landscape will look more favourable for the self-employed.