What is IR35?
IR35 is tax legislation that targets 'disguised employment' - contractors who work like employees but operate through their own limited company to pay less tax.
Current Rate (2025/26)
If caught by IR35, you pay tax/NI as if employed
Example
You contract for one client, work their hours, use their equipment. HMRC may decide you're effectively employed and should pay employee-level taxes.
Key Dates
Medium/large clients must determine IR35 status before engagement starts
How IR35 Works in Practice
IR35, formally known as the Intermediaries Legislation and now commonly referred to as the off-payroll working rules, is designed to ensure that individuals who work like employees pay broadly the same tax and National Insurance as employees, even if they provide their services through their own limited company (a Personal Service Company or PSC).
The rules work differently depending on who your client is. For contracts with medium or large private sector clients (and all public sector clients), the end client is responsible for determining whether IR35 applies. This is known as the off-payroll working rules. The client assesses whether the engagement would be employment if the intermediary (your company) were removed. If they determine it is inside IR35, the fee-payer (usually the agency or client) must deduct PAYE tax and NI from your payments.
For contracts with small private sector clients, the original IR35 rules still apply and the responsibility for determining status rests with you, the contractor. A small company is one that meets two of three criteria: turnover under £10.2m, balance sheet under £5.1m, or fewer than 50 employees.
The financial impact of being inside IR35 is significant. Instead of taking a low salary and dividends from your company, you effectively pay employee-level tax and NI on the deemed employment payment. This typically increases your tax bill by 20-25% compared to working outside IR35. For many contractors, this eliminates the tax advantage of operating through a limited company.
Step by Step
The determination of whether IR35 applies is based on employment status tests that have been developed through decades of case law. The three key factors are: control (does the client control how, when, and where you work?), substitution (could you send someone else to do the work?), and mutuality of obligation (is the client obliged to offer work and are you obliged to accept it?).
For medium and large clients, the client must issue a Status Determination Statement (SDS) before the engagement begins, setting out their conclusion and the reasons. If you disagree, you have a right to dispute the determination through the client's status disagreement process. HMRC also provides the Check Employment Status for Tax (CEST) tool, although its reliability has been challenged in tribunal.
If a contract is inside IR35, the fee-payer deducts tax and employee NI at source. They also pay employer NI. The deemed payment is calculated by taking the fee, deducting 5% for notional expenses and any employer NI, then applying PAYE to the remainder. If you operate outside IR35, you manage your own tax affairs through your limited company in the normal way.
Practical Tips
- Keep a detailed log of how each contract operates in practice: who controls your schedule, whether you can substitute, and whether you have genuine business risk
- Get professional IR35 insurance and consider a specialist status review for high-value contracts, as the cost is small relative to the potential tax liability
- If a client determines you are inside IR35, use the formal disagreement process and provide evidence of genuine self-employment indicators
- Structure your business to demonstrate genuine self-employment: work for multiple clients, invest in your own equipment, maintain a business website, and have your own professional indemnity insurance
Common Mistakes to Avoid
- Assuming that having a written contract with substitution clauses automatically puts you outside IR35, when HMRC looks at the reality of the working relationship, not just the contract wording
- Not challenging a client's Status Determination Statement when you believe it is incorrect, missing the opportunity to use the formal disagreement process
- Failing to keep evidence of working practices (such as emails showing control, substitution attempts, or lack of mutuality) that could support your position in an HMRC enquiry
- Ignoring IR35 risk when the client is a small company, where the responsibility for status determination falls on you as the contractor
Frequently Asked Questions
How do I know if IR35 applies to my contract?
The key tests are control (how much the client directs your work), substitution (whether you can send a replacement), and mutuality of obligation (whether work must be offered and accepted). If the working relationship looks like employment once you strip away the company, IR35 likely applies. HMRC's CEST tool provides initial guidance.
Who decides IR35 status?
For medium and large private sector clients and all public sector clients, the end client decides. They must issue a Status Determination Statement. For small private sector clients, the contractor decides. A small company is one meeting two of three criteria: turnover under £10.2m, assets under £5.1m, fewer than 50 employees.
What happens if I am caught inside IR35?
You pay tax and NI as if you were an employee. The fee-payer deducts PAYE and employee NI from your payments and pays employer NI on top. This significantly reduces your take-home pay compared to working outside IR35. You are allowed a 5% deduction for deemed expenses.
Can I still work through my limited company if inside IR35?
Yes, you can still use your limited company, but the tax advantages largely disappear for that contract. Some contractors maintain their company for outside-IR35 contracts while accepting inside-IR35 work on a deemed employment basis. Others consider moving to an umbrella company for inside-IR35 work.
Is IR35 being scrapped?
There have been political discussions about reforming IR35, but as of 2025/26 the off-payroll working rules remain fully in force. Any future changes would be announced in a Budget or fiscal event. Do not assume changes will happen without official confirmation.
Source: HMRC ESM0500 - Employment Status Manual: Intermediaries Legislation
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