Limited Company vs Inside IR35 – What Actually Changes?

IR35 doesn’t stop you from contracting – it simply changes how you operate.

When a role is outside IR35, you trade as an independent business through your Limited Company. When it’s inside IR35, the client or agency treats the role as employment for tax purposes, and income is typically taxed at source.

Because the client decides IR35 status, not you, it’s important to understand what changes in practice once that decision is made. This guide explains the key financial, administrative and working differences between the two models – and how you can use that knowledge to plan ahead and even negotiate fairer rates.

• IR35 changes how you’re paid, not what you’re worth
• Limited Company operation offers flexibility and efficiency, while inside IR35 roles bring simplicity and reduced admin
• You can negotiate higher rates for inside IR35 contracts to maintain fair take-home pay
• Keep your company ready for outside opportunities – the market shifts constantly
• The best contractors adapt confidently to both structures

(Figures illustrative only – actual results vary by role and rate)

Outside IR35, your company invoices the client or agency for its services. You then choose how to pay yourself – usually a small salary topped up by dividends.

Inside IR35, payment is treated like a salary. Tax and National Insurance are deducted before you receive your income, often through the client’s payroll or an umbrella arrangement. You don’t invoice for services in the same way, and you can’t take dividends from that contract income.

Outside IR35, you pay Corporation Tax on company profits and can draw dividends, which are taxed at lower rates. Inside IR35, you pay full PAYE income tax and employee NI, while the fee-payer (client or agency) covers employer NI.

That’s why take-home pay inside IR35 tends to be around 10-20 % lower for the same contract rate. You’re paying more tax overall, but you also have less admin and no corporate liability.

When operating through your Limited Company, you can claim legitimate business expenses such as insurance, software, professional fees, accountancy costs and travel to client sites (subject to HMRC’s 24-month rule).

Inside IR35, the scope for claiming expenses is much narrower. Travel and subsistence are only deductible in very specific cases – because HMRC deem your place of work as ‘permanent employment’ – and most day-to-day business costs are not allowed.

If a contract is inside IR35, your tax burden is higher, and you don’t receive benefits like paid holidays, sick pay or employer pension contributions. To stay on a level footing with outside IR35 contractors or permanent employees, you may need to negotiate a higher day rate.

Contractors who come prepared with clear figures are in a stronger position. Use reliable data from the Contractor Calculator take-home pay tools, which model the difference between inside and outside IR35 roles based on current tax rates.

As a general guide, an inside IR35 rate around 20-25 % higher than the equivalent outside rate may achieve a similar net income.

Example: If an outside IR35 contract pays £500 per day, a comparable inside IR35 rate might need to be around £600-£650 per day to offset the higher deductions.

Be realistic, not every client has budget flexibility, but showing you understand the numbers and can back them up with credible data helps justify a fair adjustment. Negotiation is about maintaining parity for the value you deliver.

Operating through a Limited Company involves ongoing responsibilities such as:

• Submitting annual accounts and Corporation Tax returns
• Registering for VAT (if applicable)
• Maintaining business insurance
• Invoicing and record-keeping

When you’re inside IR35 and running the contract through your limited company, you are still required to meet all of the above filing obligations.

If however you run your IR35 contract through an umbrella company instead, most of this work disappears.

If you already have a Limited Company, you can – and often should – keep it open. Many contractors alternate between inside and outside engagements. Keeping the company active ensures you can move quickly when an outside opportunity arises without needing to start from scratch later.

Because managing company accounts, VAT returns and PAYE income from different roles can be complex, many contractors choose to use a specialist accountant. An accountant can help you stay compliant, track earnings accurately across both inside and outside IR35 contracts and plan for tax efficiency.

Using the same provider for both your accounting and umbrella services – as SG Accounting offers – keeps everything under one roof, making it far easier to manage mixed-status income within a single tax year.

Outside IR35, you usually decide how and when to complete the work. The client is buying a service or outcome, not your time. You manage your own tools, schedule and delivery approach.

Inside IR35, the client has greater control. You may follow internal procedures, attend team meetings or work to set hours. These practical differences often feel subtle day to day but are significant legally.

• Your skills, experience and market value remain the same
• You’re still self-employed between contracts, even if one engagement is taxed as employment
• You can move between inside and outside IR35 roles as opportunities arise
• Good financial management and compliance matter in both models

Many modern contractors work both inside and outside IR35 during the year. You might take a long inside contract for stability, then switch to an outside role for greater flexibility and efficiency.

To stay organised:

• Maintain clear records for each engagement
• Keep your Limited Company compliant, even if dormant for short periods
• Track which income is PAYE (inside) vs company earnings (outside)

This mixed approach is now common, and completely legitimate, as long as each role is handled according to its IR35 status.

Knowing what actually changes under IR35 helps you plan, negotiate and stay compliant. Whether your next engagement is inside or outside IR35, you can still protect your income and operate confidently with the right setup.

At SG Accounting, we help contractors manage both sides of IR35 – from Limited Company accounting and compliance to understanding take-home pay and rate negotiations.

If you’d like to discuss your options or calculate the difference in take-home pay, our team can help you make an informed decision.

(Header image: photo by TheStandingDesk on Unsplash )