Off-payroll working rules (commonly known as IR35) shifted to the private sector in April 2021. Five years on, the labour market for contractors looks very different. Banks, insurers, and large consultancies blanket-determine contracts as "inside IR35" to manage risk. Smaller end-clients (under the SME threshold) still leave the determination with the worker's PSC. The choice between limited company and umbrella is more nuanced than ever.
The three statuses, simplified
- Outside IR35 via PSC: the contractor operates through their own limited company, takes a small salary plus dividends, retains funds for pension and reinvestment.
- Inside IR35 via PSC: the fee-payer (usually the agency) deducts PAYE and NIC at source. The PSC receives net pay and limited expenses. Most planning routes close.
- Umbrella: the contractor is an employee of the umbrella company. Income is taxed as salary, with statutory rights and minimal admin.
Outside IR35: still the best position when you can defend it
A genuine outside-IR35 engagement allows the contractor to:
- Pay a tax-efficient salary at the secondary threshold (GBP 9,100 for 2026-27).
- Draw dividends within the basic-rate band at 8.75% effective tax (above the personal and dividend allowance).
- Contribute to a SIPP from company profits, reducing corporation tax.
- Claim a full suite of business expenses: home office, accountancy, professional indemnity, equipment, training, mileage.
To defend the position, the contract and working practices must show substitution rights, lack of mutuality of obligation, and lack of control. Status determinations (SDS) issued by the end-client are not gospel; they can be challenged through the client-led disagreement process.
Inside IR35 through a PSC: usually pointless
Once inside IR35, the deemed payment rules strip out almost all tax efficiency. Running a PSC still costs accountancy fees, Companies House filing, and admin time. For most inside-IR35 engagements, umbrella beats PSC on simplicity unless the contractor expects to switch between inside and outside contracts within the same tax year.
Umbrella: simple, but choose carefully
An umbrella company puts the contractor on PAYE. Net take-home is roughly equivalent to inside-IR35 PSC, minus the umbrella margin (typically GBP 20 to 30 per week). Benefits include statutory sick pay, holiday pay accrual, and pension auto-enrolment.
Watch for:
- Tax avoidance schemes: any umbrella offering 80%+ take-home is using a disguised remuneration scheme. HMRC's spotlights and the loan charge regime will catch up.
- Holiday pay handling: ensure rolled-up holiday pay is correctly itemised on the payslip.
- Margin clarity: the umbrella margin should be the only deduction beyond statutory PAYE, NIC, and pension.
The hybrid model: a PSC kept dormant
Many contractors operate through an umbrella for inside-IR35 contracts while keeping a Ltd company on the shelf for any outside-IR35 work, training income, or product side projects. This costs about GBP 600 per year in compliance fees but preserves optionality. We help clients structure this through dormant company filings and selective accountancy.
Pension is the biggest lever
For outside-IR35 contractors, employer pension contributions from the company are deductible against corporation tax and not subject to PAYE or NIC. A contractor billing GBP 600 per day can comfortably contribute GBP 40,000 to GBP 60,000 per year to a SIPP, reducing corporation tax and building long-term wealth. This single lever often exceeds the benefit of dividend optimisation.
The 2026 reality
The Conservatives' 2022 plan to repeal off-payroll rules was reversed within weeks. Both major parties now treat the IR35 framework as settled. End-clients have largely standardised on either blanket inside determinations or detailed contract reviews. The market for genuine outside-IR35 work persists in specialist domains: cloud architecture, regulatory compliance, niche engineering, and time-bound projects.
How PushDigits supports contractors
We run our contractor practice as a fixed-fee monthly service: company accounts, corporation tax, payroll, VAT (where registered), personal self-assessment, and quarterly tax forecasts. We do contract reviews jointly with IR35 specialists for high-value engagements. Forming a Ltd takes a day; structuring it correctly for IR35 longevity takes a conversation. Book a contractor strategy call or read our contractor sector page.