What is IR35?

IR35 is the nickname for the off-payroll working rules. It was introduced in 2000 to tackle what HMRC calls “disguised employment.”

Here’s the situation it’s aimed at: someone works for a business through their own limited company (often called a personal service company, or PSC), but in practice they do the job just like a normal employee would. Without IR35, that person could pay less tax and National Insurance than an employee doing the same work — by taking money out as dividends, for example. IR35 exists to make sure that where a contractor is really an employee in all but name, they pay broadly the same tax as an employee.

In one sentence: IR35 asks the question — if we ignore the limited company in the middle, would this person look like an employee? If yes, they should be taxed like one.

Inside vs outside IR35

You’ll hear contractors talk constantly about being “inside” or “outside” IR35. This is just shorthand for which side of the line an engagement falls on.

• Outside IR35 — the engagement is genuine self-employment. The contractor is running a real business, working for themselves, and is taxed as a company. They can pay themselves through a mix of salary and dividends.
• Inside IR35 — the engagement looks like employment. The contractor must be taxed broadly like an employee, with Income Tax and National Insurance deducted before they’re paid. This typically reduces take-home pay compared with being outside.

Importantly, IR35 is only about tax status. Being “inside IR35” doesn’t give the contractor employee rights like holiday pay or a pension — it just changes how they’re taxed.

How is your status decided?

There’s no single box to tick. HMRC looks beyond the contract at how the work actually happens day to day. A few factors carry the most weight:

• Control — how much say does the client have over what you do, how, when and where? More control points towards employment.
• Substitution — could you send someone else to do the work in your place? A genuine right to substitute points towards self-employment.
• Mutuality of obligation — is the client obliged to offer work and are you obliged to accept it? An ongoing, open-ended commitment looks more like employment.

Other things matter too — whether you take financial risk, use your own equipment, work for multiple clients, and how integrated you are into the client’s team. HMRC weighs up the whole picture, which is why IR35 is rarely black and white.

Who decides — and this is the crucial part

Who is responsible for deciding the status (and carrying the risk) depends on the size of the client — the business receiving the work.

Medium and large clients, and all public sector bodies

Since April 2021 in the private sector (and 2017 in the public sector), the client is responsible for deciding a contractor’s IR35 status. They must take reasonable care, and give the worker a Status Determination Statement (SDS) explaining the decision and the reasons for it. This responsibility can’t simply be passed to the contractor.

Small private sector clients

Small businesses in the private sector are exempt from the 2021 reforms. Where the client is small, the responsibility stays with the contractor’s own company to assess its status — the original, older IR35 rules.

A company is generally “small” if it meets at least two of these three conditions:

Turnover not more than £15 million; balance sheet total not more than £7.5 million; no more than 50 employees on average.

The turnover and balance-sheet figures were raised from their previous levels (£10.2 million and £5.1 million). Because the rules assess size based on the previous financial year, the practical effect for many businesses lands around the 2026/27 tax year — moving some clients out of scope. Always check GOV.UK for the current thresholds.

The CEST tool

HMRC provides a free online tool called CEST — Check Employment Status for Tax — to help work out whether an engagement is inside or outside IR35. If you answer honestly and the answers reflect how the work really operates, HMRC says it will stand by the result.

That said, CEST has limits: it doesn’t always give a clear answer, and it doesn’t test every factor (it’s often criticised for how it handles mutuality of obligation). It’s a useful starting point, not the final word — in tricky cases, a professional IR35 review is wise.

What happens if you’re inside IR35?

When an engagement is inside IR35 under the off-payroll rules, the “deemed employer” — usually the agency or client that pays the contractor’s company — deducts Income Tax and employee National Insurance from the fees before paying the contractor’s company. The deemed employer also pays employer National Insurance (and the Apprenticeship Levy where it applies) on top, as an extra cost.

For the contractor, the result is take-home pay much closer to what an employee would receive — typically meaningfully lower than being outside IR35.

What happens if you get it wrong?

Getting an IR35 decision wrong is expensive. HMRC can demand backdated Income Tax and National Insurance, plus interest and penalties — and investigations can stretch back over several years.

The size of any penalty depends on behaviour: a careless mistake is treated more leniently than a deliberate one. Under the off-payroll rules, the liability for unpaid tax generally sits with the fee-payer (the deemed employer), provided everyone in the chain has met their own obligations. This is why clients and agencies now take determinations so seriously.

Recent and upcoming changes

IR35 keeps evolving, so it’s worth knowing what’s changed recently:

• Higher small-company thresholds. The turnover and balance-sheet limits that define a “small” client have risen, which is expected to move some businesses out of the off-payroll regime from around the 2026/27 tax year.
• Umbrella company crackdown (from April 2026). New rules make recruitment agencies (or the end client) jointly responsible if an umbrella company fails to pay the correct PAYE and National Insurance. This pushes everyone in the supply chain to do more checks on the umbrellas they use.

The government has also signalled it may keep reviewing how the rules work, so contractors and businesses should keep an eye on GOV.UK announcements.

Practical tips

• Make sure your contract reflects how the work really happens — HMRC looks at reality, not just paperwork.
• Watch for engagements drifting from project-based work into ongoing, employee-like arrangements over time.
• Keep records of your status determinations and the reasoning behind them.
• If you’re a client, take reasonable care over each determination and issue a proper Status Determination Statement.
• For anything borderline or high-value, get a professional IR35 review rather than relying on a tool alone.

Quick FAQ

Does IR35 apply if I’m a sole trader?

No. IR35 only applies where you work through an intermediary such as your own limited company (a PSC). Sole traders are assessed under separate employment-status rules.

Does being inside IR35 give me employee rights?

No. IR35 is purely about tax. It doesn’t entitle you to holiday pay, sick pay, or a pension from the client.

Who decides my status — me or the client?

It depends on the client’s size. Medium and large clients (and all public sector bodies) decide. If the client is a small private business, your own company decides.

Can HMRC investigate past contracts?

Yes. HMRC can look back over several years if it thinks a status determination was wrong, and demand backdated tax, interest and penalties.

Is CEST the final word?

No. It’s HMRC’s tool and a helpful starting point, but it doesn’t cover every factor. In complex cases a professional review is more reliable.

Official sources

This guide is based on official UK government information. Always check GOV.UK and HMRC for the latest rules and thresholds, as these can change:

• UK — Understanding off-payroll working (IR35)
• UK — Check Employment Status for Tax (CEST) tool
• UK — Off-payroll working rules for clients, workers and agencies
• UK — Deemed employer responsibilities under off-payroll working
• HMRC — Help to comply with the reformed off-payroll working rules

This article is for general information only and is not a substitute for professional tax or legal advice. IR35 can be highly fact-specific — if your situation is borderline or high-value, consider a specialist IR35 review or speaking to an accountant.