IR35 explained for contractors
How the off-payroll working rules decide whether a contract is 'inside' or 'outside' IR35, who makes that call, and what it changes about your take-home pay.
Written by M Adeel · Last updated 29 October 2026
What IR35 is actually checking
IR35 — officially the off-payroll working rules — exists to answer one question: if your limited company didn't exist, would HMRC consider you an employee of the client you're working for? It looks past the paperwork at how the engagement actually works in practice: how much control the client has over how, when and where you do the work, whether you could send a substitute to do the work instead of you personally, and whether there's an expectation of ongoing work being offered and accepted (mutuality of obligation). Score closer to 'employee' on those tests and the contract is 'inside IR35'; score closer to 'genuinely in business on your own account' and it's 'outside IR35'.
Who decides your status
Since April 2021, for engagements with medium or large private-sector clients, it's the end client — not the contractor — who must assess status and issue a Status Determination Statement (SDS) explaining the decision and reasoning. If a contractor disagrees, there's a formal status disagreement process to challenge it with the client. For genuinely small clients (broadly, those meeting the Companies Act definition of a small company), the old rules still apply and the contractor's own limited company determines its own status.
Whoever makes the deemed employment payment — usually the agency or client paying the limited company, known as the 'fee-payer' — is legally responsible for deducting tax and National Insurance correctly if a contract is found to be inside IR35, not the contractor's own company.
Inside vs outside IR35 at a glance
| Inside IR35 | Outside IR35 | |
|---|---|---|
| How you're paid | Deemed employment — tax and NI deducted before payment, like a salary | Your limited company invoices in full; you decide salary vs dividends |
| National Insurance | Employee and employer NI both apply to the deemed payment | No employee/employer NI on dividend income |
| Corporation Tax | Not really applicable — income is taxed as deemed employment | Company profits taxed at the Corporation Tax rate before dividends |
| Expenses | Very limited allowable expenses | Wider range of genuine business expenses allowable |
| Who decides status | End client (for medium/large clients) via a Status Determination Statement | Contractor's own company (for small clients only) |
A worked example: deemed employment on £95,000
Say a contractor's limited company bills £95,000 for a contract found to be inside IR35. Treated as a deemed salary and taxed through the standard Income Tax bands: the £12,570 Personal Allowance leaves £82,430 taxable, with £37,700 at 20% (£7,540) and the remaining £44,730 at 40% (£17,892) — £25,432 of Income Tax. Employee National Insurance on the same figure: 8% on the £37,700 between £12,570 and £50,270 (£3,016), plus 2% on the £44,730 above £50,270 (£894.60) — £3,910.60. Together that's £29,342.60 in Income Tax and employee NI alone, before employer NI is even accounted for, leaving a net figure broadly similar to taking the same £95,000 as a straightforward PAYE salary — which is exactly the point of the rules.
Outside IR35, the same £95,000 of company income would typically be split between a small salary and dividends after Corporation Tax, taxed under the lower dividend rates described in our dividend tax guide — usually leaving noticeably more in the contractor's pocket, which is why genuinely outside-IR35 engagements remain attractive despite the extra admin of running a company properly.
Why clients often decide conservatively
Since the end client carries the compliance risk for a wrong status decision, many medium and large organisations have historically erred on the side of declaring roles inside IR35 even in borderline cases, simply to avoid the administrative risk of a wrong call. This has been a genuine source of frustration for contractors who feel their working arrangement is clearly outside IR35 on the actual facts, but find the client unwilling to take that position. It's one of the main reasons the formal status disagreement process exists — to give a contractor a documented route to challenge a determination they believe doesn't reflect how the engagement actually works.
Common mistakes
- Assuming a contract clause alone settles IR35 status — HMRC looks at how the engagement actually works day to day, not just what the paperwork says.
- Treating the small-client exemption as a free pass — it shifts who determines status back to the contractor's own company, but the contract still needs a genuine, honest assessment against the same tests.
- Not keeping evidence of working practices — things like having the right to send a substitute, or evidence of working for multiple clients, can matter if a status decision is ever challenged.
- Confusing an umbrella company arrangement with IR35 status — umbrella company pay is simply taxed as standard employment income regardless of IR35, since there's no separate limited company involved.
- Forgetting that employer NI and other deductions come out of the contract rate before a deemed salary is even calculated when inside IR35 — the rate on the contract isn't the same as the income the figure is actually based on.
Frequently asked questions
For medium or large private-sector clients, the end client decides and must issue a Status Determination Statement. For small clients, your own limited company determines its own status.
Inside IR35, you're taxed broadly like an employee — Income Tax and National Insurance on a deemed salary. Outside IR35, your company pays Corporation Tax on its profits and you typically draw a mix of salary and lower-taxed dividends, which usually leaves more take-home pay.
Yes — there's a formal status disagreement process for challenging a client's Status Determination Statement if you believe it's wrong.
No. You're taxed similarly to an employee for that engagement, but you don't gain employment rights like holiday pay or redundancy protection from the client.
Not in the same way — umbrella company pay is simply treated as standard employment income, since there's no separate limited company whose status needs determining.
This guide is general information, not financial or tax advice — check GOV.UK or a qualified adviser for anything that affects a real financial decision.