What Is IR35? The Complete Guide for Contractors

If you contract through your own limited company, or you’re thinking about it, IR35 is the rule that decides how much of your money you keep. So what is IR35? In plain English: it’s tax legislation that tests whether you’re genuinely running a business, or whether you’re really an employee in disguise who should be taxed like one.

That single question drives your take-home pay, your paperwork and often your choice of contracts. This guide explains the whole picture: what IR35 means, how “inside” and “outside” status works, who decides, what it costs you, and what’s changed for 2026/27.

We’re specialist accountants for contractors working outside IR35, so we’ll keep this practical and honest.

What is IR35? A plain-English definition

IR35 is the everyday name for the off-payroll working rules. They apply when you provide services to a client through an intermediary, usually your own limited company (HMRC calls this a personal service company, or PSC: a limited company you control and own a stake in, through which you sell your work).

The rules ask one question about each contract: if the company wasn’t in the middle, would you look like an employee of the client? If the answer is yes, the contract is “caught” by IR35 and the income from it gets taxed like a salary.

The name is a piece of history. The rule was announced in 1999 in an Inland Revenue press release numbered IR35, and it has been law since 2000. The press release name stuck, even though the legislation has changed shape since.

What has changed matters far more than the name: who decides your status. The Off-Payroll Working reforms moved that responsibility from you to your end client. It happened in the public sector on 6 April 2017, and was extended to medium and large private sector businesses on 6 April 2021.

Before those reforms, your own company judged each contract and carried the risk of getting it wrong. Today, on most private sector engagements, the client makes the call and has to give you a written determination. Smaller clients are the exception, and we come back to what that means for you below.

In short, the IR35 meaning is simpler than the name suggests: it’s not a tax in itself, but a test that decides which tax rules apply to your contract income.

Why does IR35 exist?

IR35 exists to tackle what HMRC calls disguised employment.

Picture two people at the same desk, doing the same job, managed by the same boss. One is an employee on payroll. The other billed through a limited company, paid less National Insurance, and took income as dividends. Before IR35, the second person could take home considerably more for identical work, and the client saved on employer’s National Insurance too.

HMRC’s stated aim is that someone who works like an employee should pay “broadly the same Income Tax and National Insurance as an employee would”, whatever structure sits in the middle. So IR35 is not aimed at people who genuinely run their own business. It is aimed at engagements that look like employment in all but name.

What do “inside IR35” and “outside IR35” mean?

Every contract you hold sits on one side of that line, and which side it lands on decides how your fees are taxed. Here is what each side means in practice.

What does “outside IR35” mean?

Outside IR35 means the rules don’t apply to that contract: you’re genuinely self-employed for that engagement. You keep the full limited-company model:

• You pay yourself through a mix of salary and dividends, which is normally more tax efficient than payroll alone.
• You claim legitimate business expenses through the company.
• You keep control of the company’s cash, including when you take dividends and how much you put into a pension.

This is the position our clients are in, and it is where contracting is often at its most rewarding. You can read more in our guide to working outside IR35.

Which brings up the point that shapes everything else on this page: to stay outside IR35, you have to be able to show that you are genuinely not an employee of your client. Not only in the wording of the contract, but in how the work is actually done day to day. The tests in the next section are how that gets judged.

What does “inside IR35” mean?

Inside IR35 means HMRC treats you as an employee for tax purposes on that contract. Income Tax and both employee’s and employer’s National Insurance are accounted for on your fees, usually deducted before the money reaches you. The dividend advantage largely disappears, which is why most contractors on inside-IR35 engagements get paid through an umbrella company instead of their own limited company. Our inside IR35 guide covers the mechanics.

Can you be both at once?

Yes. Status is decided per contract, not per person. You can run an outside-IR35 contract through your company while also holding an inside-IR35 engagement. Each contract is assessed on its own facts. Our inside vs outside IR35 comparison puts the two side by side.

How is your IR35 status decided?

Status comes down to what the working relationship really looks like, tested against principles built up through decades of employment case law. Three tests carry most of the weight.

• Control: who decides how, when and where you work? A genuine business has real autonomy. If the client directs your day like a manager would, that points inside.
• Substitution: could you send a suitably qualified substitute to do the work, and would the client accept one? A genuine right of substitution is strong evidence you’re a business. If the client is buying you personally, that points inside.
• Mutuality of obligation (MOO): is the client obliged to keep offering you work, and are you obliged to accept it? Ongoing mutual obligation looks like employment. A business finishes the project and leaves.

Other factors feed in around these three: whether you use your own equipment, whether you carry financial risk, and whether you’ve become “part and parcel” of the client’s organisation.

HMRC offers a free online tool, Check Employment Status for Tax (CEST), which gives HMRC’s view of a status based on your answers. HMRC says it will stand by the result as long as your information is accurate and in line with its guidance, though the tool has been criticised for simplifying areas the courts treat as nuanced.

This is a summary, deliberately. The tests deserve a page of their own, and we’ve written one: see how IR35 status is determined.

Who decides your status: you or your client?

It depends on the size of your client. This is the single biggest thing the reforms changed.

As covered above, the Off-Payroll Working reforms moved this decision to the client. Since 6 April 2017 in the public sector, and 6 April 2021 in the private sector, medium and large clients are responsible for deciding your IR35 status. The process is meant to work like this:

• Reasonable care over the decision. Your engagement is assessed on its own facts. Blanket decisions covering a whole role or department do not count.
• A Status Determination Statement (SDS), completed for your engagement. It states their conclusion, inside or outside IR35, and the reasons behind it.
• A response if you disagree. Once you make representations against an SDS, your client has 45 days to either confirm the conclusion with reasons or issue a new statement.

What is a Status Determination Statement (SDS)?

An SDS is your client’s written verdict on your engagement. It states their conclusion, whether you are inside or outside IR35, and the reasons for reaching it. Your client should complete one for each engagement they assess.

Two things are worth knowing about it:

• Reasonable care matters. The determination should be based on the facts of your engagement. Blanket, role-based decisions applied to every contractor with the same job title do not meet that standard, and a determination made without reasonable care does not count as an SDS.
• If your client gets it wrong, the liability can stay with them. Where the reformed rules apply, responsibility for the Income Tax and National Insurance on your fees sits with your client until they issue a proper SDS.

In practice, a copy rarely reaches you on its own. We recommend our clients request one: ask your end client for it in writing at the start of the engagement, and keep the SDS on file alongside your contract.

What if your client is small?

If your client counts as small and is outside the public sector, the reformed rules don’t apply, and your own company remains responsible for deciding status, as it was before 2017. (Public authorities apply the rules whatever their size.) A company is small if it meets at least two of these three conditions:

• Annual turnover of £15 million or less
• Balance sheet total of £7.5 million or less
• 50 or fewer employees

Here’s the part worth your attention: those thresholds went up in April 2025 (turnover was previously £10.2 million and balance sheet £5.1 million). As the higher thresholds feed through, more clients will count as small, which means more contractors will get the status decision, and the responsibility that comes with it, back in their own hands. If that’s you, understanding the tests above just became more important, not less.

The wider mechanics of who holds liability sit in our guide to the off-payroll working rules, with the legislation’s detail in IR35 rules.

What does IR35 actually cost you? Inside vs outside take-home

The rules matter because the money does. Here’s a worked example for 2026/27.

Take a contractor billing £500 a day, working 48 weeks a year (about £120,000 of annual billings):

• Outside IR35, through their own limited company: roughly £6,060 a month in take-home pay (around £72,800 a year, or 61% of billings).
• Inside IR35, paid through an umbrella company: roughly £5,590 a month (around £67,100 a year, or 56% of billings).

The gap is about £470 a month, or £5,700 a year, at the same day rate. That’s the cost of an inside determination, and it’s why status is worth taking seriously.

Treat those figures as illustrative.* Take-home depends on the assumptions behind it: your salary and dividend split, allowable expenses, pension contributions, whether you are VAT registered, your umbrella’s margin, and your own tax code. Change the assumptions and the numbers move. What does not change is the direction of the gap. Run your own numbers with our interactive outside IR35 vs umbrella calculator.

In short: same work, same rate, meaningfully different take-home.

Who does IR35 apply to, and who’s exempt?

IR35 applies to anyone providing services through an intermediary, in any sector. It’s most associated with IT, but it reaches consultants, engineers, interims, and media professionals alike.

Just as important is who it doesn’t apply to, because the myths cause real confusion:

• Sole traders are not caught by IR35. The rules need an intermediary in the chain. Sole traders face separate employment-status rules instead, with the risk sitting mainly with the client, which is why agencies rarely engage them.
• Umbrella employees don’t need an IR35 assessment. If an umbrella company employs you, you’re already on a payroll and taxed as an employee, so there’s nothing for IR35 to test.
• A small client doesn’t make you exempt. It moves the decision (and the risk) to your company rather than removing it.

What’s changed recently? A 2026 update

IR35 has had a lively few years. Here’s what actually matters now, newest first.

• From 6 April 2026, umbrella company PAYE compliance changed. Where an umbrella company employs the workers, responsibility for operating PAYE correctly now sits with the recruitment agency (or with the end client if there is no agency), and HMRC can pursue them for any shortfall. If you use an umbrella for inside-IR35 work, expect agencies to be far pickier about which umbrellas they’ll deal with.
• From February 2026, HMRC clarified student loan handling. Deemed employers do not deduct student or postgraduate loan repayments from off-payroll workers’ fees. If you’re inside IR35 with a student loan, you settle repayments yourself through Self Assessment.
• The small-company thresholds went up in April 2025, as covered above. As the uplift feeds through, more contractors will be back to determining their own status.
• Since 6 April 2024, the “set-off” rules apply. Where a client gets a determination wrong, HMRC now offsets the Income Tax, National Insurance and Corporation Tax the contractor and their company already paid on that income against the client’s PAYE bill. This fixed the old double-taxation problem, where HMRC could effectively collect the same tax twice.
• The 2022 repeal that wasn’t. The September 2022 mini-Budget promised to repeal the 2017/2021 reforms; the new Chancellor reversed that within weeks. The reformed rules stayed, and refinement rather than repeal has been the pattern since.

What happens if HMRC decides a status was wrong?

An HMRC challenge that succeeds means the engagement’s income gets retaxed as employment income, with back taxes, interest, and potentially penalties on top.

Who pays depends on who held the decision. Where the reformed rules apply (medium and large clients), the liability generally sits with the client or the fee-payer, not you. Where your company made the call (small clients, or pre-reform years), the risk is yours.

Two moderating points. The set-off rules mean tax already paid on that income now reduces the bill rather than being ignored. And a client that took reasonable care, documented its reasoning, and followed the SDS process is in a far stronger position than one that made blanket calls. This is an area for accuracy, not panic.

How do you stay outside IR35, legitimately?

There’s no trick to staying outside IR35: the way to pass a test of whether you’re genuinely in business is to genuinely be in business. In practice, that means:

• A contract that reflects reality. Tribunals look through paperwork to the actual working relationship, so the two must match.
• A real right of substitution, ideally one that’s been exercised or at least is credible.
• Project-based work with deliverables, not an open-ended role on a team rota.
• Your own equipment, where the work allows it.
• More than one client over time, and marketing yourself as a business.
• No employee perks: no holiday pay, sick pay or staff benefits from the client.

None of these alone settles it; the picture as a whole does. Our outside IR35 guide goes deeper on each.

IR35 FAQs

1. What does IR35 stand for? Nothing technical: it was the number of the 1999 Inland Revenue press release (“IR” for Inland Revenue, release 35) that announced the rule.
2. Does IR35 apply to sole traders? No. IR35 requires an intermediary such as a limited company. Sole traders are covered by separate employment-status rules, where the risk mostly sits with the client.
3. How does IR35 work? Each contract is tested against employment-status principles (control, substitution, mutuality of obligation). If the engagement looks like employment, the income is taxed like a salary; if not, normal limited-company taxation applies.
4. Can I be inside IR35 on one contract and outside on another? Yes. Status is per contract, so a portfolio of engagements can be split across both.
5. Does IR35 apply if my client is small, or based overseas? The rules still apply, but the responsibility moves: with a small private sector UK client (or a client that’s wholly overseas), your own company determines status and carries the risk. Public sector clients apply the rules whatever their size.
6. Do umbrella company workers need to worry about IR35? No. Umbrella workers are employees of the umbrella and already taxed through PAYE, so IR35 has nothing to test.
7. How much more tax do I pay inside IR35? At £500 a day, our 2026/27 worked example puts the difference at roughly £470 a month in take-home pay versus working outside through a limited company. The gap grows with your rate.
8. Who pays if HMRC decides a determination was wrong? Under the reformed rules, generally the client or fee-payer; where your company decided (small or overseas clients, or pre-2021 private-sector contracts), your company. Tax already paid on the income is now set off against the bill.

*Take-home figures are for the 2026/27 tax year, are rounded and are for illustration only. They are not tax advice; your own position depends on your rate, expenses, pension and circumstances.