Inside vs Outside IR35: What IT contractors need to know about rates, tax and take-home pay

Published: 26 Dec 2025

If you’re an IT contractor in the UK, you’ve almost certainly seen contract roles advertised as “Inside IR35” or “Outside IR35”. These labels are more than just legal jargon — they have a direct impact on your day rate, tax position, and overall take-home pay.

For contractors working in technology roles such as software development, cloud engineering, cybersecurity, DevOps, data, or IT project delivery, understanding the difference between inside and outside IR35 is essential before accepting a contract.

This guide explains the key differences, the pros and cons of each, and which option is generally better for IT contracting roles.

Outside IR35 Explained (Preferred by Most IT Contractors)

An outside IR35 contract means the role is considered a genuine business-to-business engagement. You are treated as an independent contractor rather than an employee for tax purposes.

Most outside IR35 IT contractors operate through a Personal Service Company (PSC).

Outside IR35 – Pros

  • Higher take-home pay due to more tax-efficient income structure

  • Ability to pay yourself via salary and dividends

  • Greater control over pension contributions and tax planning

  • Can claim legitimate business expenses

  • Clear separation between contractor and client (important in IT consulting roles)

Outside IR35 – Cons

  • More administration (accounts, company filings)

  • Requires genuine compliance with IR35 rules

  • HMRC can challenge contracts if working practices don’t match the paperwork

Inside IR35 Explained

An inside IR35 contract means HMRC considers the role to be similar to employment for tax purposes. You pay tax broadly in line with a permanent employee, even though you remain a contractor.

Most inside IR35 IT roles are paid via:

  • An umbrella company, or

  • Agency PAYE

Inside IR35 – Pros

  • Simpler administration

  • PAYE tax handled automatically

  • Can suit short-term or transitional contracts

Inside IR35 – Cons

  • Significantly lower take-home pay

  • PAYE tax plus National Insurance deductions

  • No real employment benefits (no sick pay, no paid holidays)

  • Often poor value unless the day rate is uplifted

Why Do Inside and Outside IR35 Day Rates Differ?

You may notice contracts advertised like this:

  • £600 per day – Outside IR35

  • £450 per day – Inside IR35

This difference exists because outside IR35 contractors keep more of their earnings after tax. Inside IR35 roles often look attractive on paper but result in much lower net income once deductions are applied.

For many IT professionals, an inside IR35 role needs to pay 20–30% more than an equivalent outside IR35 role to achieve similar take-home pay.

Which Is Better for IT Contracting Roles?

The Short Answer: Outside IR35 is usually better

For most IT and technology contractors, outside IR35 contracts are financially superior and better reflect the reality of specialist, project-based work common in tech.

IT contractors often:

  • Deliver project outcomes

  • Work with minimal supervision

  • Use in-demand specialist skills

  • Move frequently between clients

These factors align far more naturally with outside IR35 engagements.

Inside IR35 contracts may still make sense if:

  • The rate is high enough to compensate for tax

  • You want minimal admin

  • The role is short-term or offers continuity during quiet market periods

A Word of Caution on IR35 Status

An “outside IR35” label alone is not enough. Your working practices must match the contract. Factors such as control, substitution, and mutuality of obligation are critical.

Many IT contractors choose to work with an accountant or IR35 specialist to ensure compliance and reduce risk.

Finding the Right IT Contract Role

Whether you prefer inside or outside IR35 roles, the key is to compare take-home pay, not just headline day rates.

You can browse a wide range of UK IT and tech contract opportunities — including roles clearly marked inside or outside IR35 — on our contract jobs board here: https://www.byte7.co.uk/jobs/contract/contract

Key Takeaways

  • Outside IR35 contracts typically offer better financial outcomes for IT contractors

  • Inside IR35 roles can work, but only if the rate reflects the tax impact

  • Always assess contracts based on net pay, risk, and working practices

For specialist IT professionals, outside IR35 remains the gold standard for contracting — offering flexibility, higher take-home pay, and a structure that suits modern tech consulting work.

 

Back to listing