IR35
IR35 Explained
Inside or outside IR35? Understand the UK's off-payroll working rules, who decides your status and what they mean for your tax.
IR35 is UK tax legislation designed to ensure that contractors working through an intermediary, usually their own limited company, pay broadly employment-equivalent Income Tax and National Insurance when the engagement would be employment for tax purposes if they worked directly for the client.
How does IR35 work in the UK?
IR35 examines the relationship between a contractor and their client. The key question is whether the contractor would be considered an employee for tax purposes if the intermediary company were removed from the arrangement.
It is not simply about whether you have a limited company, issue invoices or describe yourself as self-employed. HMRC and the courts consider the contractual terms alongside the working relationship in practice.
Inside IR35 vs outside IR35
Inside IR35
The engagement is treated as employment for tax purposes. Under the client-led rules, the deemed employer generally deducts PAYE Income Tax and employee National Insurance from the relevant payment and pays employer National Insurance separately.
- Employment-style taxation applies to the relevant fees.
- Dividend tax planning cannot replace PAYE treatment on those fees.
- Your limited company may still continue trading.
- Tax status does not automatically create employment rights.
Outside IR35
The engagement is treated as self-employment for IR35 purposes. Your company ordinarily receives its contract fees without off-payroll PAYE deductions and accounts for its own business taxes.
- Corporation Tax applies to taxable company profits.
- Salary and dividends can be considered under normal rules.
- Legitimate business expenses may be deductible.
- Evidence supporting genuine independence remains important.
| Feature | Inside IR35 | Outside IR35 |
|---|---|---|
| Tax treatment | Employment-style taxation on relevant fees | Normal company taxation |
| PAYE deductions | Generally required | Not required under IR35 |
| Employer NI | Generally borne by deemed employer under Chapter 10 | No deemed employer NI under IR35 |
| Company operation | Can continue | Can continue |
| Dividend flexibility | Restricted for already-taxed deemed employment income | Normal company profit distribution rules |
| Employment rights | Not automatically granted | Not automatically granted |
Who is responsible for your IR35 determination?
Answer two simple questions to identify the usual responsibility for determining employment status. This is a responsibility checker, not a legal IR35 status determination.
1. Who is your end client?
2. What is the client's size classification for the relevant tax year?
Who decides whether IR35 applies?
Responsibility depends on the nature and size of the end client, rather than the size of the contractor's own company.
| End client | Who assesses status? | Who operates relevant tax deductions? |
|---|---|---|
| UK public sector | End client | Deemed employer / qualifying fee-payer |
| Medium or large UK private-sector client | End client | Deemed employer / qualifying fee-payer |
| Small UK private-sector client | Contractor's intermediary | Intermediary operates Chapter 8 deemed payment rules if applicable |
| Client wholly overseas without UK connection | Contractor's intermediary | Intermediary if IR35 applies |
Different size tests can apply to certain non-corporate clients. If a client claims to be small, request confirmation of its classification for the relevant tax year.
What determines whether a contract is inside IR35?
There is no single universal test. The full contractual relationship and actual working practices must be assessed together.
Substitution
Can the contractor genuinely provide a suitably qualified substitute? A genuine, workable right of substitution can support independent contractor status, but the detail matters.
Control
How much control does the client exercise over what work is done, how it is performed, when it is done and where it takes place?
Mutual obligations
Consider the obligations to provide and perform work, the nature of each engagement and whether an ongoing employment-style relationship exists.
Financial risk
Does the contractor bear genuine business risk, correct defective work at their own cost or have an opportunity to profit through efficient delivery?
Business independence
Independent branding, equipment, insurance, multiple clients and business infrastructure can be relevant, but none guarantees outside-IR35 status.
Integration and intentions
Consider whether the contractor is integrated into the client's organisation and what the parties genuinely intended, assessed against the actual relationship.
How much tax do you pay inside IR35?
Inside IR35, the relevant deemed employment income is subject to Income Tax and employee National Insurance. Under Chapter 10, the deemed employer also pays employer National Insurance, which must not simply be deducted from the agreed deemed direct payment.
The amount a contractor ultimately retains depends on the agreed rate, payroll treatment, tax code, other income, pension contributions and contractual arrangements.
Illustrative contract value
This is a gross fee illustration, not a net-pay calculation. Under an inside-IR35 arrangement, PAYE and National Insurance must be calculated on the correct statutory payment base. Employer contributions and agency margins should be considered separately when comparing advertised contract rates.
Where the intermediary receives income already subjected to Chapter 10 PAYE, special rules help prevent the same income being taxed again when properly paid out. The company must still account for any other taxable profits and comply with its reporting obligations.
What is an IR35 Status Determination Statement?
A Status Determination Statement (SDS) records the end client's decision about whether the off-payroll rules apply and explains the reasons for that conclusion.
Where the client-led rules apply, the client must take reasonable care and communicate its determination to the worker and the party it contracts with. A generic decision that all contractors are inside IR35, without properly considering their arrangements, is not an acceptable substitute for an assessment.
If you agree with the decision
Keep a copy of the SDS, check that the actual working arrangements match the assessment and confirm how payments and payroll deductions will be handled.
If you disagree with the decision
Submit a reasoned disagreement supported by contract terms and working-practice evidence. The client generally has 45 days to respond under the statutory disagreement process.
HMRC's Check Employment Status for Tax (CEST) tool can help assess an engagement. Its output depends on accurate answers and does not replace the need to consider the full factual circumstances.
What should contractors do before accepting a contract?
- Confirm the end client: establish the actual organisation receiving your services and its relevant size classification.
- Obtain the status assessment: request an SDS where the client-led rules apply.
- Review working practices: check control, substitution, obligations and business risk, not just contractual labels.
- Understand the payment terms: establish whether the advertised rate is an assignment rate, company fee or PAYE gross pay.
- Keep evidence: retain contracts, project scopes, communications, invoices and status assessments.
- Plan your accounts: separate inside-IR35 income from other company trading income and avoid duplicate taxation.
- Reassess when circumstances change: a contract extension or material change in working practices may justify a new assessment.
Contractors who operate through a personal service company may also need assistance with annual accounts filing, Corporation Tax, payroll, VAT and personal tax returns.
IR35 FAQs
What does IR35 stand for?
IR35 is the commonly used name for the UK's intermediaries legislation. The name comes from the Inland Revenue press release announcing the original measures in 1999.
Is IR35 still in force in 2026?
Yes. The off-payroll working rules remain in force in 2026/27. The rules introduced for public-sector clients in 2017 and medium and large private-sector clients in 2021 have not been abolished.
Does IR35 apply to sole traders?
IR35 normally concerns workers providing services through an intermediary, usually a personal service company. A sole trader working directly for a client is not normally subject to IR35, although general employment-status rules can still apply.
Can I have contracts both inside and outside IR35?
Yes. Each engagement is considered separately. Different clients, contractual terms and working practices can result in different tax status outcomes.
Does being inside IR35 make me an employee?
Not automatically. IR35 concerns tax status. Being treated as employed for tax purposes does not itself confer employee rights such as holiday pay, sick pay or unfair dismissal protection.
Who pays employer National Insurance inside IR35?
Under the client-led Chapter 10 rules, the deemed employer is responsible for employer National Insurance on the relevant deemed employment payment. Under the original Chapter 8 rules, the intermediary calculates and accounts for its deemed employment payment and associated liabilities.
Can I challenge an inside-IR35 decision?
Yes. Under the client-led rules, workers and deemed employers can use the client's disagreement process. Provide clear reasons and supporting evidence. The client must respond within the statutory timeframe.
Can a limited company contractor avoid IR35?
Operating through a limited company does not exempt a contractor from IR35. Genuine independent business arrangements may fall outside the rules, but the actual contractual relationship must support that conclusion.
Does working from home mean I am outside IR35?
No. Working location is only one potentially relevant aspect of control. Remote working alone does not determine employment status.
What happens if HMRC finds an incorrect IR35 assessment?
Additional Income Tax, National Insurance, interest and potentially penalties may arise. The party liable depends on which legislative regime applies and the circumstances, including compliance with client-led responsibilities.
Can I use an umbrella company instead?
An umbrella company generally employs the worker and operates PAYE. A genuine umbrella employment arrangement is different from contracting through your own intermediary, although contractors should check payslips, deductions, assignment rates and any scheme promising unusually high take-home pay.
What is the difference between IR35 and CEST?
IR35 refers to the tax legislation. CEST is HMRC's online tool for assessing employment status for tax. CEST can help inform an IR35 decision but is not itself the legislation.
Need help understanding your IR35 position?
Whether your contracts fall inside or outside IR35, accurate accounting and tax planning remain essential. The Online Accountants provides UK-wide online accountancy services for limited company contractors, directors and owner-managed businesses.
Related contractor tax guides
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