A contractor who works exactly like an employee but invoices through a company is, in HMRC's eyes, a disguised employee. IR35 exists to tax that arrangement the same as a salary.
Picture two people doing identical work at the same company: same desk, same manager, same nine-to-five. One is on the payroll as an employee. The other invoices through a limited company they own and pays noticeably less tax on the same money. To HMRC, the second person is a disguised employee, an employee in all but legal form. Tackling exactly this arrangement is the entire purpose of the IR35 rules.
The motive is tax. An employee has Income Tax and both employee and employer National Insurance taken from their pay. A contractor working through a limited company can instead take a small salary topped up with dividends, which carry no National Insurance and lower rates of tax. For the same gross fee, the take-home difference can run to thousands of pounds a year.
That is a legitimate structure when someone is genuinely in business on their own account. It becomes "disguised" employment when the company is just a wrapper around what is really a job. HMRC's position is that tax should follow the substance of the relationship, not the label on the invoice.
There is no single switch. HMRC examines the working relationship against several established tests, weighing them together.
Secondary factors include whether the worker takes financial risk, provides their own equipment, works for several clients, and is integrated into the client's organisation. The more the picture resembles a member of staff, the more likely the engagement is "inside IR35".
Take Sam, who left a salaried analyst role and returned the next week doing the same job, same team, same manager, but now invoicing £80,000 a year through his own company in 2025/26.
| Factor | Sam's reality | Points to |
|---|---|---|
| Control | Manager sets tasks and hours | Employment |
| Substitution | Cannot send anyone else | Employment |
| Mutuality | Client must offer work; Sam must do it | Employment |
| Other clients | None | Employment |
On these facts, the engagement is disguised employment and falls inside IR35. Sam's £80,000 is taxed as employment income: 20% and 40% Income Tax (45% above £125,140) plus employee National Insurance, deducted before he receives it. He loses the salary-and-dividend advantage entirely. The IR35 calculator shows how much that costs him versus a genuine outside-IR35 engagement.
The safest defence against a disguised-employment finding is to be, and to be able to prove you are, genuinely in business. That means real substitution clauses that are actually exercisable, control over your own working methods, multiple clients, your own equipment, and the freedom to turn down work. Contract wording alone is not enough: HMRC and the tribunals look at what happens in practice. Keeping evidence of genuine independence is what turns "disguised employee" back into "self-employed contractor".
Disguised employment is judged on substance, not paperwork. If you would be an employee once the company is stripped away, IR35 treats you as one.
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