IR35 is one of the most talked-about — and most misunderstood — areas of UK tax. If you work through your own limited company (a personal service company, or PSC), IR35 determines whether HMRC views you as genuinely self-employed or as a "disguised employee." The financial difference is significant.
What is IR35?
IR35 — formally known as the off-payroll working rules — is legislation designed to ensure that contractors who work like employees pay broadly the same tax and National Insurance as employees. The name comes from the HMRC press release that introduced the original rules in 2000: Inland Revenue 35.
The rules apply on a contract-by-contract basis. You might have some contracts that are inside IR35 and others that are outside — your overall employment status is not fixed across all engagements.
Who is affected?
IR35 affects you if you:
- Provide services to a client through your own limited company (a PSC) or other intermediary
- And the nature of the work is such that you would be considered an employee if you contracted directly — without the company in between
Sole traders are not subject to IR35 in the same way, because their income is already taxed via Self Assessment without the intermediate company structure.
Who decides your IR35 status?
This is where the rules have changed significantly over the past decade:
Public sector clients (NHS, councils, government departments): the client has been responsible for determining IR35 status since 2017.
Medium and large private sector clients: the client is responsible for determining status since April 2021. They must provide you with a Status Determination Statement (SDS) explaining their reasoning.
Small private sector clients: the contractor's own company remains responsible for determining status. A small business is one that meets at least two of these three conditions: fewer than 50 employees, annual turnover under £10.2 million, balance sheet under £5.1 million.
How is employment status determined?
There is no single test — HMRC and the courts look at the whole picture. The three most important factors are:
Control: Does the client control how, when and where you work? The more control the client has, the more likely you are inside IR35.
Substitution: Can you send a substitute to do the work in your place, without the client's approval? A genuine right of substitution points strongly toward outside IR35.
Mutuality of obligation: Is the client obliged to offer you work, and are you obliged to accept it? If yes, this is more like employment. Outside IR35 engagements are typically project-based, with no guarantee of ongoing work.
Other factors include whether you supply your own equipment, whether you work for multiple clients, whether you can profit from efficient working, and whether there is a genuine financial risk to your business.
HMRC provides the Check Employment Status for Tax (CEST) tool to help assess status — though its conclusions are not always binding and have been challenged in tribunal.
What does being inside IR35 actually cost?
If a contract is inside IR35, the "deemed employer" (usually the agency or end client) must operate PAYE. Your company receives a net payment after deductions, and you lose the ability to extract profits as dividends at lower tax rates.
In practice this means your income is treated as employment income — subject to income tax at 20%, 40% or 45%, plus employee National Insurance at 8% (up to the upper earnings limit) and 2% above. The deemed employer also pays employer NI at 15% on your income above the £5,000 secondary threshold. That employer NI effectively comes out of your contract rate.
The difference compared to being outside IR35 — where you'd pay corporation tax and take dividends — can easily amount to £10,000–£20,000 per year on a typical contractor rate. Use our IR35 Calculator to model the exact figures for your contract rate.
What can you do to protect yourself?
Working practices matter at least as much as what the contract says. Even a well-worded "outside IR35" contract won't protect you if your day-to-day working arrangement looks like employment. Consider: do you actually have the right to substitute? Do you take on financial risk? Do you work for multiple clients?
If your client issues an "inside" SDS that you disagree with, you can formally challenge it through their status disagreement process. Keep records, document your working practices, and consider specialist IR35 insurance if your contracts are in a grey area.