~7 min read
So, your contract's been deemed 'Inside IR35'. You might be wondering, "What does this actually mean for my wallet?" In simple terms, when you're Inside IR35, you're taxed much like a regular employee. This means your income goes through the PAYE (Pay As You Earn) system. Let's break down what gets taken out before that cash hits your bank account.
The Main Deductions: What Comes Off Your Pay?
When you're working an Inside IR35 contract, especially through an umbrella company (which is the most common route), several things are deducted from the initial rate the client or agency pays. It's not just your personal tax!
- Umbrella Company Margin: This is the fee the umbrella company charges for their services – processing your payroll, handling admin, providing insurance, etc. It's usually a fixed weekly or monthly amount.
- Employer's National Insurance Contributions (NICs): As your 'employer', the umbrella company has to pay Employer's NI on your earnings. This is a significant cost (currently 13.8% on earnings above a certain threshold for most for the 2025/2026 tax year) and it comes out of the assignment rate *before* your gross pay is calculated.
- Apprenticeship Levy: If your umbrella company has a large enough payroll bill (over £3 million a year), they'll also pay the Apprenticeship Levy (0.5% of their pay bill). This is another employer cost that's typically funded from the assignment rate.
- Employer's Pension Contributions: Umbrella companies are legally required to auto-enrol eligible workers into a workplace pension scheme and make minimum employer contributions (currently 3% of 'qualifying earnings' for the 2025/2026 tax year). This, too, is an employer cost deducted from the assignment rate.
- Your Gross Pay (for tax purposes): After all the above have been deducted from the initial assignment rate, what's left is your gross pay. This is the figure that your personal taxes will be based on.
- Income Tax (PAYE): This is the tax you pay on your gross earnings, calculated based on UK tax bands and your personal tax code (which tells your 'employer' how much tax-free income you get).
- Employee's National Insurance Contributions: This is your personal NI contribution, also deducted from your gross pay.
- Employee Pension Contributions: If you're contributing to a pension (either the auto-enrolment one or through salary sacrifice), these will be deducted. Salary sacrifice contributions are taken before tax, which is a nice tax-saving perk! Read more on pensions and salary sacrifice here.
- Student Loan Repayments: If you have a student loan, repayments will be deducted once your income hits the relevant threshold for your plan type.
Phew! That's quite a list, isn't it? For a hands-on look, pop your figures into our main IR35 Calculator, or see a visual example with our Umbrella Payslip Explainer.
Let's See an Example (It's Just Illustrative!)
Okay, numbers time! Let's imagine a simplified scenario to see how this might look. Remember, this is just an illustration. Your actual figures will depend on your specific contract rate, umbrella margin, tax code, pension choices, and more. Always use our calculator for a personalised estimate!
Let's say your annual assignment rate (what the client/agency pays the umbrella) is £60,000. We'll assume a standard tax code (e.g., 1257L for 2025/2026 in England/NI) and some typical umbrella deductions:
| Item | Approx. Annual Amount (£) |
|---|---|
| Assignment Rate (from client/agency) | 60,000.00 |
| Less: Umbrella Margin (£25/week) | (-) 1,300.00 |
| Less: Employer's National Insurance | (-) 5,823.50 |
| Less: Employer's Pension (3% on qualifying) | (-) 1,320.90 |
| Less: Apprenticeship Levy (0.5%) | (-) 256.50 |
| Equals: Your Gross Pay (for tax purposes) | 51,299.10 |
| Less: Income Tax (PAYE) | (-) 7,951.64 |
| Less: Employee's National Insurance | (-) 3,036.30 |
| Estimated Annual Take-Home Pay | 40,311.16 |
As you can see, the deductions add up! The initial £60,000 assignment rate results in an estimated £40,311.16 take-home pay in this specific example for the 2025/2026 tax year. This is why it's vital to understand all the deductions when you're quoted an Inside IR35 rate.
What Else Can Affect Your Net Pay?
The example above is fairly standard, but a few other things can tweak your final take-home figure:
- Your Tax Code: If it's not the standard one (e.g., if you have other income or allowances), your tax-free amount will differ.
- Your Tax Region: Scotland has different income tax bands and rates which can affect your pay. Wales can also set its own rates, though they currently mirror England/NI for 2025/2026.
- Pension Contributions: Making larger pension contributions, especially via salary sacrifice, can significantly reduce your tax bill and boost your retirement savings.
- Student Loan Plan: Different plans have different repayment thresholds and rates.
- Umbrella Company Specifics: Margins can vary slightly, and some umbrellas might have different ways of handling things like holiday pay accrual or passing on savings from Employer's NI if they make them.
Can You Make the Best of an Inside IR35 Situation?
While an Inside IR35 contract generally means less take-home pay than a comparable Outside IR35 one, there are still things to consider:
- Negotiate Your Rate: If you know a contract is Inside IR35, try to negotiate a higher assignment rate to account for the additional employment costs that will be deducted.
- Salary Sacrifice for Pensions: If your umbrella offers it, this is a very tax-efficient way to save for your pension.
- Understand the Benefits: Remember, as an 'employee' of the umbrella, you do get some statutory benefits like holiday pay and access to a workplace pension.
For more ideas, check out our guide on Maximising Your Take-Home Pay.
Working Inside IR35 does mean navigating these deductions, but understanding them is the first step. Always use a reliable calculator (like ours!) to get a clear picture before you sign on the dotted line.