How much tax do you pay inside IR35 on pension contributions?

IR35 is a complex bit of legislation that determines a contractor’s tax liabilities. Those who fall inside IR35 are required to pay income tax and National Insurance like a permanent employee. Increasing pension contributions may lower the amount of tax due, but there’s no requirement to alter existing arrangements.

What is IR35?

IR35 is a piece of legislation that’s designed to determine whether a Director of a limited company should be classed as an independent contractor or a ‘disguised employee’ who’s doing the same work as a permanent employee but with the tax benefits of a contractor.

The legislation uses a range of criteria to assess your status. There are three key criteria:

  • control (how much say the client has over your work)
  • mutuality of obligation (if the client has to offer you work, and if you have to accept it)
  • substitution (whether you need to do the work yourself)

According to HMRC’s Employment Status Manual, other criteria may include (but isn’t limited to):

  • equipment
  • financial risk
  • basis of payment
  • holiday pay, sick pay and pension rights
  • part and parcel of the organisation
  • right to terminate a contract
  • opportunity to profit from sound management
  • personal factors
  • length of engagement
  • intention of the parties

You can check your status using the Government’s own IR35 assessment tool.

The outcome will determine how you should be paying tax. If you’re deemed to be operating within IR35, you can continue doing so but you’ll be left having to pay the required taxes without receiving the benefits afforded to permanent employees.

Recent changes mean that in cases where a contractor’s already working for a public sector client, assessing IR35 status will become the contractor’s responsibility - rather than the client’s - from April 2021.

How much tax do you pay inside IR35?

Those who are deemed to be a permanent employee by IR35 legislation are required to pay the following taxes:

  • Income tax
  • National Insurance

This was previously calculated after a 5% allowance was deducted from gross earnings, but the allowance was removed in April 2020.


If you earned £40,000 a year, you’d sit within the basic rate income tax band (20%).

You’d receive a £12,570 income tax personal allowance, leaving tax due on the remaining £27,430. You’d pay 20% income tax on that, amounting to £5,486.

You’d also need to pay Class 1 National Insurance, which is more tricky to calculate. Using this calculator, we estimate it would be around £3,724 on earnings of £40,000.

After allowances and taxes have been accounted for, your final net take-home income would be around £30,790.

You could reduce the amount of tax further by claiming expenses or by contributing to a pension.

How does IR35 affect pension contributions?

Whether you fall within IR35 or not, your existing pension contributions won’t need to change and you’ll continue to receive pension tax relief from the government.

If you continue to work through a limited company, you may be able to minimise your income tax by increasing your pension contributions.

If you decide to join your client as a permanent employee, your pension contributions will work the same as any other employee - you’ll make personal contributions and your employer will make employer contributions of at least 3% of your salary.

Are there specific pensions for those inside IR35?

You may see pensions advertised to those falling within IR35, but there’s no such thing as an ‘IR35 pension’.

That’s because the role of a pension provider is simply to invest your contributions. How those contributions are made is up to you.

If you’re looking for a simple way to make contributions online, consider PensionBee.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Last edited: 06-04-2024

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