IR35, or the off-payroll working rules, is tax legislation designed to stop "disguised employment". It applies when someone provides services through their own limited company (a personal service company) but works in a way that, if the company were removed, would look like employment. If the rules apply, the contractor must pay broadly the same Income Tax and National Insurance as an employee, removing the tax advantage of working through a company.

What is the difference between inside and outside IR35?

Inside IR35 means the engagement is treated as employment for tax: Income Tax and National Insurance are deducted as though the contractor were an employee, so the take-home pay is lower. Outside IR35 means the contractor is genuinely self-employed in business on their own account, and can be paid gross through their company and take a tax-efficient salary-and-dividend mix. The status is judged on the reality of the working relationship.

Who decides IR35 status?

Since the 2017 public-sector reform and the 2021 private-sector reform, the end client usually decides the contractor's IR35 status and issues a Status Determination Statement. For engagements with small private-sector clients (those meeting the small-company exemption), the contractor's own limited company remains responsible for assessing status, as under the original rules.

Does IR35 apply to sole traders?

No, not directly. IR35 applies to work done through an intermediary such as a limited company. A sole trader has no company to look through, so the off-payroll rules do not apply to them. However, sole traders still face HMRC employment-status checks under separate rules to ensure they are genuinely self-employed.

What is a Status Determination Statement?

A Status Determination Statement (SDS) is the document a client must produce, under the post-2021 rules, setting out its decision on a contractor's IR35 status and the reasons for it. The client must take reasonable care in reaching the decision and pass the SDS to the contractor and any agency in the chain.

Can I be inside IR35 for one contract and outside for another?

Yes. IR35 status is assessed engagement by engagement, not for you as a person. You might work outside IR35 for one client where you are genuinely independent, and inside IR35 for another where the working relationship resembles employment. Each contract is judged on its own facts.

What happens if HMRC decides I am inside IR35 after the fact?

If HMRC successfully reclassifies a past engagement as inside IR35, the party responsible for the determination can face back-dated Income Tax and National Insurance, plus interest and potentially penalties. Under the post-2021 rules this liability usually sits with the client or fee-payer, but for small-client engagements it remains with the contractor's company.

What Is IR35? Off-Payroll Working Rules Defined

IR35 is the rule contractors love to hate, and with reason: a single status determination can swing your take-home pay by thousands of pounds a year, and you are not always the one who makes the call. The legislation has a deceptively simple aim, to stop people working as employees in all but name while paying tax as if they were a business. The difficulty is that "in all but name" turns out to be genuinely hard to define, which is why IR35 has been argued, reformed and litigated for two decades.

Key takeaways

IR35 targets 'disguised employment', contractors who work like employees but bill through their own company.
If you are 'inside IR35', you pay broadly the same tax and National Insurance as an employee.
If you are 'outside IR35', you are genuinely self-employed and can pay yourself tax-efficiently.
Since the 2021 private-sector reform, the end client usually decides status, except for small clients.
Status turns on the real working relationship: control, substitution and mutuality of obligation.

The Problem IR35 Was Built to Solve

Imagine someone who leaves a salaried job on Friday and returns on Monday doing exactly the same work, at the same desk, under the same manager, but now invoicing through a limited company they own. Nothing about the job has changed, yet the tax bill has fallen sharply, because company income taxed via salary and dividends attracts less tax and National Insurance than a regular wage.

That is precisely the arrangement IR35 was created to catch. The rules look through the company to the substance of the relationship. If, ignoring the company, the contractor would be an employee, then IR35 applies and they must pay broadly employee-level tax. The legislation only bites when work is done through an intermediary, typically a personal service company, which is why it is bound up with how a limited company is used by contractors.

Personal service company (PSC): A limited company through which an individual contractor provides their services to clients, usually with the contractor as the sole director and shareholder, the typical structure IR35 examines.

Inside vs Outside IR35

Every engagement falls into one of two camps, and the difference is financial.

Outside IR35: The contractor is genuinely in business on their own account. They can be paid gross through their company and extract income as a tax-efficient salary-and-dividend mix. This is the favourable position.
Inside IR35: The engagement is treated as employment for tax. Income Tax and National Insurance are deducted as though the contractor were on the payroll, sharply reducing take-home pay and removing the dividend advantage.

The status hinges on the reality of how the work is done, not the wording of the contract. HMRC weighs factors such as control (who decides how, when and where you work), the right of substitution (can you send someone else?), and mutuality of obligation (must the client offer work and must you accept it?). The IR35 calculator shows the take-home difference between the two outcomes.

Who Decides, and the 2021 Shift

Historically, the contractor's own company assessed its IR35 status, an arrangement HMRC felt was widely abused. That changed in two waves:

April 2017: Public-sector clients took over responsibility for determining status.
April 2021: Medium and large private-sector clients did the same.

Now, for most engagements, the end client must assess status and issue a Status Determination Statement (SDS), and the fee-payer (often an agency) operates the deductions if the contractor is inside. The exception is small private-sector clients, broadly those meeting the Companies Act small-company test, where the original rules still apply and the contractor's company decides for itself.

A Worked Example for 2025/26

Take a contractor, James, with a day rate generating £90,000 of company income in 2025/26.

Scenario	Rough tax treatment
Outside IR35	Small salary plus dividends; Corporation Tax on profit, then dividend tax at 8.75% or 33.75%; no employee NI on dividends
Inside IR35	Treated as employment income: Income Tax at 20%, 40% (and 45% above £125,140) plus employee National Insurance, deducted before James receives it

The inside-IR35 route typically leaves James several thousand pounds worse off across the year because dividends are replaced by fully taxed employment income carrying National Insurance. The exact gap depends on his salary level and band split, which is why running the figures rather than guessing matters. Our blog tracks IR35 case law and HMRC guidance as it develops, since status is an area where the detail moves.

Why Status Assessments Are So Fraught

Because so much money rides on the outcome, IR35 status is heavily contested. Many clients, wary of getting determinations wrong and inheriting tax liability, took blanket "inside" decisions after 2021, frustrating genuinely independent contractors. HMRC's own CEST tool produces a result but has been criticised for inconclusive outcomes, and several high-profile tribunal cases have gone both ways. The practical lesson is to keep evidence of genuine independence, real substitution rights, multiple clients, control over your own methods, rather than relying on contract wording alone.

IR35 ignores your contract and looks at how you actually work; the safest position is to be genuinely, demonstrably in business on your own account.

TapTax, UK tax glossary

What Is IR35? Off-Payroll Working Rules Defined

The Problem IR35 Was Built to Solve

Inside vs Outside IR35

Who Decides, and the 2021 Shift

A Worked Example for 2025/26

Why Status Assessments Are So Fraught

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