Inside IR35 vs Outside IR35
Last updated: February 2025
Quick Comparison
| Aspect | Inside IR35 | Outside IR35 |
|---|---|---|
| Tax treatment | PAYE tax and NI deducted at source | Corporation tax, salary, and dividends through PSC |
| Take-home pay | Significantly lower; similar to employment | Higher due to tax-efficient extraction |
| Responsibility | Fee-payer deducts tax (medium/large clients) | Contractor manages own tax through PSC |
| Contract requirements | Contract terms less critical as status is already determined | Contract must reflect genuine self-employment |
| Risk | Lower tax risk but lower income | Higher income but HMRC investigation risk |
What Is a Inside IR35?
A determination that a contractor's engagement is effectively employment for tax purposes, requiring tax and NI to be deducted as if they were an employee.
Key Features
- • Tax and NI deducted at source by the fee-payer
- • Contractor receives deemed employment payment
- • 5% expense allowance for PSC contracts
- • Medium and large clients must issue a Status Determination Statement
Best For
- • Engagements with high control and no substitution rights
- • Long-term roles embedded in the client's organisation
- • Situations where the contractor is a disguised employee
What Is a Outside IR35?
A determination that a contractor is genuinely in business on their own account for a particular engagement, and normal self-employed tax rules apply.
Key Features
- • Contractor draws salary and dividends from PSC
- • Full tax efficiency of limited company structure
- • Contractor must demonstrate genuine business-on-own-account factors
- • Small company clients: contractor self-assesses IR35 status
Best For
- • Genuine business-to-business relationships
- • Contractors with substitution rights, no mutuality, and limited control
- • Project-based work with defined deliverables
When to Use a Inside IR35
Inside IR35 status applies when the reality of the engagement would make the contractor an employee if engaged directly. Key indicators include high client control, no right of substitution, and mutuality of obligation.
When to Use a Outside IR35
Outside IR35 status applies when the contractor genuinely operates their own business, has the right to send a substitute, controls how work is done, and there is no mutuality of obligation between engagements.
Which Does Your Business Need?
IR35 status is determined by the reality of each engagement, not by choice. Use HMRC's CEST tool as a starting point. For medium and large private sector clients, the client must make the determination. Contractors working for small companies self-assess. Seek specialist advice for borderline cases.
FAQ
Who determines IR35 status?
For medium and large private sector clients, the client determines status and issues a Status Determination Statement. For small company clients, the contractor's PSC self-assesses. In the public sector, the client always determines status.
What is the CEST tool?
The Check Employment Status for Tax tool is HMRC's online tool for assessing IR35 status. While HMRC states it will stand by CEST results, many tax professionals consider it unreliable for borderline cases and recommend specialist advice.
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