You have received an inside-IR35 determination. Now what? This guide explains exactly what happens to your tax, what your options are, and how to challenge a determination you believe is wrong.
Under the off-payroll working rules (in force since April 2021 for the private sector), medium and large clients determine your IR35 status and issue a Status Determination Statement (SDS). If the determination is “inside”, the deemed payment mechanism works as follows:
The 5% allowance for running costs is a flat deduction intended to cover your company’s operating expenses. Beyond this, the range of expenses you can claim is severely restricted compared to outside IR35. For a full comparison, see our IR35 guide for UK contractors.
| Annual Billing | Outside IR35 Take-Home | Inside IR35 Take-Home | Annual Cost of Being Inside |
|---|---|---|---|
| £50,000 | £40,200 | £36,100 | £4,100 |
| £75,000 | £53,900 | £47,200 | £6,700 |
| £80,000 | £59,200 | £52,400 | £6,800 |
| £100,000 | £70,900 | £61,500 | £9,400 |
| £120,000 | £80,200 | £68,800 | £11,400 |
Outside IR35 assumes optimal £12,570 salary plus dividends, £5,000 expenses, 2026/27 rates. Inside IR35 assumes deemed payment mechanism with 5% running-costs allowance. See our Ltd vs PAYE calculator for your exact figures.
These numbers make the case clear: if there is any legitimate basis to challenge the determination, it is worth doing. The difference over a multi-year contract can easily reach £20,000–£50,000.
There is no single right answer. The best option depends on the strength of your case, the length of the contract, whether you have other engagements, and your risk tolerance.
You have a legal right to challenge any inside-IR35 determination. The client must respond within 45 days with either a revised determination or a written confirmation of the original with detailed reasons. This is not a confrontational process — it is a structured mechanism built into the legislation.
A well-drafted challenge backed by evidence from your actual working practices succeeds more often than most contractors expect. Many inside determinations result from blanket policies or risk-averse HR departments rather than a genuine assessment of the engagement. A specialist IT contractor accountant prepares the challenge for you, presenting evidence against each of the three IR35 tests: substitution, control and mutuality of obligation.
Best when: you genuinely believe the determination is wrong based on how you actually work, or the client issued a blanket determination without individual assessment.
Many contractors assume that being inside IR35 means they must close their limited company or move to an umbrella. That is not true. You can continue operating through your limited company — the fee-payer simply deducts tax and NI before paying your company the net amount.
Staying Ltd inside IR35 makes sense when:
The company still incurs running costs (accountancy fees, Companies House filing, bank charges) and you must file annual accounts and a corporation tax return even if most income was taxed at source. Your accountant handles all of this.
If you are inside IR35 and expect to remain so for the foreseeable future, an umbrella company removes the admin burden of maintaining a limited company while delivering a very similar net pay outcome. The umbrella employs you, invoices the client, deducts tax and NI, and pays you a net salary.
Best when: all your current and expected future contracts are inside IR35, you have no retained profits in your company, and you want zero admin. The tax outcome is almost identical to running an inside-IR35 contract through your Ltd — the difference is you save £100–£200/month in accountancy fees and Companies House obligations, at the cost of £15–£35/week in umbrella margin.
If you keep your Ltd dormant rather than closing it, you can reactivate it quickly if an outside-IR35 contract comes along. See our closing down a limited company guide for the full dormant vs close decision. Discuss the dormant company option with your accountant.
If the inside determination is genuinely wrong and the client refuses to revise it after your challenge, or if the contract rate does not cover the additional tax cost, walking away is a legitimate option. Some contractors negotiate a rate uplift to compensate for the inside-IR35 tax hit — typically 15–20% on the day rate — before deciding.
Best when: the rate does not justify the reduced take-home, you have alternative engagements available, or the principle matters to you (some contractors refuse to work inside IR35 as a matter of policy). Calculate the break-even rate before deciding — your accountant can model the exact numbers.
The process:
If your client issued a blanket inside-IR35 ruling for all contractors without assessing your individual engagement, they have not taken “reasonable care” as required by the legislation. This is one of the strongest grounds for a challenge. Document the fact that no individual assessment was made — for example, if you received the same SDS template as every other contractor with no engagement-specific reasoning.
Inside IR35, you can claim:
| Expense | Inside IR35 | Outside IR35 |
|---|---|---|
| 5% flat-rate running-costs allowance | Yes (Ltd only) | N/A (claim actuals instead) |
| Employer pension contributions | Yes | Yes |
| Professional subscriptions (HMRC-approved list) | Yes | Yes |
| Travel to client site | No | Yes (temporary workplace) |
| Equipment & software | No* | Yes |
| Home office costs | No* | Yes |
| Training & CPD | No* | Yes |
| Accountancy fees | No* | Yes |
| Client entertaining | No | No |
* These costs are incurred by your company but cannot be deducted against the deemed employment income. They can still reduce your company’s corporation tax bill on any non-deemed income, and are partially covered by the 5% flat-rate allowance.
The 5% allowance is calculated on the gross deemed payment and is intended to cover the running costs of your intermediary (Ltd company). It is a flat rate — you do not need to evidence individual expenses against it. But it only applies if you operate through an intermediary; umbrella workers do not receive it.
Employer pension contributions remain one of the most valuable tools inside IR35. Your company can still make contributions to a registered pension scheme, which are deductible against corporation tax, exempt from NI, and do not count as personal income. If you are inside IR35 and earning above the basic-rate band, maximising pension contributions is the single most tax-efficient move available. See our salary and dividend strategy guide for the mechanics.
For the full picture of what you can claim outside IR35, see our contractor expenses guide.
If you accept an inside-IR35 contract, your effective take-home drops by 10–15% compared to the same rate outside IR35. Many contractors successfully negotiate a rate uplift to compensate. The argument is straightforward: the client saves on employer obligations they would otherwise bear for a permanent employee (no holiday pay, no sick pay, no pension auto-enrolment, no redundancy liability), so sharing some of the additional tax cost is reasonable.
| Outside IR35 Day Rate | Inside IR35 Equivalent (to match take-home) | Uplift Required |
|---|---|---|
| £400 | £460 | +15% |
| £500 | £575 | +15% |
| £600 | £700 | +17% |
| £750 | £885 | +18% |
Figures are approximate and depend on expenses, pension contributions and personal circumstances. Your accountant calculates the precise uplift needed for your situation.
Not every client will agree to a rate increase, but many will — especially in competitive markets where the alternative is losing you to an outside-IR35 engagement elsewhere. Frame the conversation around the total cost of engagement: even with a 15% uplift, you are still cheaper and more flexible than a permanent employee on the same salary.
Being inside IR35 does not mean you have to navigate it alone. ICAEW-regulated and led by Godwin Pinto ACA, AccTek provides specialist support at every stage:
We work with IT contractors, freelancers and CIS subcontractors across the UK, whether your contracts are inside, outside or a mix of both.
Do I have to close my limited company if I am inside IR35?
No. You can continue operating through your limited company. The fee-payer deducts tax and NI before paying your company, but the company still exists, can hold retained profits, and can take on outside-IR35 contracts in the future. Many contractors keep their Ltd open even during extended inside-IR35 engagements.
Is an umbrella cheaper than a limited company inside IR35?
The tax outcome is very similar. The difference is admin cost: a limited company costs £100–£200/month in accountancy fees, while an umbrella charges £60–£140/month in margin. However, the Ltd gives you the 5% running-costs allowance (umbrellas do not), which can offset the higher cost. Your accountant models the exact comparison. See our umbrella vs limited company guide for full details.
Can the client change my IR35 determination later?
Yes. If working practices change — for example, you take on a more defined project scope, start working for additional clients, or gain genuine control over method — the client should reassess. You can also submit a new challenge at any contract renewal. Proactively documenting changes in working practice strengthens your case.
What is the 5% running-costs allowance?
When inside IR35, your limited company can deduct 5% of the gross deemed payment as a flat-rate allowance for company running costs. This covers accountancy fees, insurance, bank charges and other overheads without needing to evidence individual expenses. It is only available when working through an intermediary (your Ltd) — umbrella workers cannot claim it.
What happens if the client does not respond to my challenge within 45 days?
If the client fails to respond within 45 days, the responsibility for deducting tax and NI transfers from the fee-payer (usually the agency) to the client itself. This is a significant liability shift — it creates a strong financial incentive for the client to respond promptly. Your accountant or IR35 specialist flags this deadline in the challenge letter.
Can I negotiate a higher rate to compensate for being inside IR35?
Yes, and many contractors do successfully. The typical uplift needed to match your outside-IR35 take-home is 15–18% on the day rate. Frame it around total cost: even with the uplift, you remain cheaper and more flexible than a permanent employee. Your accountant calculates the exact rate needed for your income level.
Can I claim travel expenses inside IR35?
No. Travel to a workplace is not deductible inside IR35 because you are treated as an employee of the end client for tax purposes, and the workplace is considered permanent. This is one of the largest single expense items contractors lose inside IR35 — often £2,000–£5,000 per year. The 5% flat-rate allowance partially offsets this but rarely covers it fully.
Challenge the determination, optimise your remaining tax tools, or model the switch to umbrella — we help you make the right call.
