IR35
IR35 is the UK tax rule that decides whether a contractor working through their own limited company is genuinely in business or is really an employee of the client. Inside IR35 means income is taxed broadly like employment, with PAYE and National Insurance instead of dividends.
Also known as: off-payroll working rules, intermediaries legislation
How it works
IR35 looks past the contract paperwork and asks a simple question: if the intermediary company were removed, would the relationship between the worker and the client look like employment? If yes, the engagement is inside IR35 and the income is taxed as employment income.
Three tests carry the most weight. Control covers how much say the client has over what you do, when, where and how. Substitution asks whether you can genuinely send a suitably qualified replacement without the client's veto. Mutuality of obligation asks whether the client must offer work and you must accept it. Supporting factors include financial risk, whether you use your own equipment, whether you work for several clients and whether you look part of the organisation.
Who decides depends on the client. For work with public sector bodies and medium or large private companies, the client makes the status determination and issues a Status Determination Statement, and the fee-payer operates PAYE. Where the client is a small company, the contractor's own company remains responsible for deciding status and accounting for the tax. Small is defined by the Companies Act test on turnover, balance sheet total and employee numbers.
Inside IR35 the financial effect is significant. A deemed employment payment removes the ability to draw the same income as dividends and adds employer National Insurance at 15% above £5,000 on the fee-payer side. Outside IR35, the company pays corporation tax at 19% to 25% and the director takes a salary and dividends, using the £500 dividend allowance.
Status is decided contract by contract, not for the company as a whole. Keep the written contract, the Status Determination Statement, evidence of working practices and any CEST output for each engagement. That evidence pack is what an HMRC review will ask for.
Worked example (2026/27)
£100,000 contract income: outside versus inside IR35 (2026/27)
| Contract income | £100,000 |
|---|---|
| Outside IR35: salary £12,570 plus dividends from post-tax profit | Corporation tax at 19% then dividend tax from 10.75% |
| Inside IR35: deemed employment payment | PAYE and employee NI, plus employer NI at 15% |
| Typical take-home difference | Commonly £5,000 to £10,000 a year on this level of fee |
Indicative only. The gap depends on expenses, pension contributions and other income, so run your own figures on the IR35 calculator.
Who this affects
- Contractors and consultants working through a personal service company
- IT and engineering contractors on long client engagements
- Interim finance and marketing professionals on rolling contracts
- Recruitment agencies acting as fee-payer in the supply chain
- Small companies engaging contractors, who stay outside the client-decides rules
Common mistakes
- Relying on a contract clause that working practices do not support
- Assuming a single blanket status applies to every engagement
- Keeping no Status Determination Statement or CEST record for the engagement
- Continuing to draw dividends on income already taxed under PAYE inside IR35
Frequently asked questions
Who decides my IR35 status?
Public sector bodies and medium or large private clients decide and issue a Status Determination Statement. Where the client is a small company, your own company decides.
Does being inside IR35 make me an employee?
No. It is a tax status only. You do not gain employment rights such as holiday pay or redundancy from a determination.
Should I close my company if I am inside IR35?
Not necessarily. Many contractors hold engagements of both kinds, and the company still suits outside-IR35 work, expenses and future contracts.
How far back can HMRC review status?
Normally four years, extending to six where the error was careless and twenty where it was deliberate.
Related terms
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Related reading
Reviewed by Waqas Sagar ACA FCCA FMAAT · Last reviewed 13 September 2026 · Figures for 2026/27 · About our practice
Official sources
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