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IR35 and Off-Payroll Working Rules Explained
IR35 (the off-payroll working rules) decides whether a contractor working through their own company is genuinely self-employed or really an employee for tax purposes. Getting status wrong can trigger PAYE liabilities and penalties.
Quick answers
What is IR35?
IR35 is the UK's off-payroll working rules. It applies when someone provides services through their own company (a PSC) but works in a way that resembles employment. If inside IR35, the engagement is taxed like employment with PAYE and Class 1 NI deducted at source.
Who decides IR35 status?
The client normally determines status for public-sector and medium/large private-sector engagements; the PSC normally does so for small private-sector clients. Apply HMRC’s relevant financial-year, group and transition rules. Companies Act threshold increases do not automatically change the off-payroll test in April 2025. https://www.gov.uk/guidance/off-payroll-working-for-clients
What's the difference between inside and outside IR35?
Inside IR35 means the engagement is treated as employment for tax — income tax and Class 1 NI are deducted at source. Outside IR35 means the contractor is genuinely self-employed via their company and can take dividends and salary, paying Corporation Tax and Self Assessment.
What is IR35?
IR35 — formally the off-payroll working rules — targets contractors who supply services through an intermediary (usually their own personal service company, PSC) but who would be treated as employees if engaged directly. Where the rules apply, the engagement is inside IR35 and tax/NI must be paid as if it were employment income.
Who decides status?
| Sector | Who determines status | Who deducts tax |
|---|---|---|
| Public sector (since 2017) | Client | Fee-payer (often agency) |
| Medium/large private sector (since April 2021) | Client | Fee-payer |
| Small private sector clients | Contractor's PSC | Contractor's PSC |
Apply the off-payroll client-size test for the relevant tax year and financial year, including group and transition rules. The Companies Act size increases do not automatically change IR35 status from April 2025. See HMRC client guidance.
Inside vs outside IR35
Inside IR35 — the engagement looks like employment. Income tax and Class 1 NI are deducted at source by the fee-payer; the contractor receives a "deemed payment" net of tax.
Outside IR35 — the contractor is genuinely in business on their own account. They invoice gross, take dividends and salary as they choose, and pay tax via Corporation Tax + Self Assessment.
Status factors (the CEST tests)
HMRC's Check Employment Status for Tax (CEST) tool weighs three core factors:
- Personal service / substitution — does the contractor have a genuine right to send a substitute?
- Control — does the client direct what, how, when and where the work is done?
- Mutuality of obligation — must the client offer work and the contractor accept it?
Other factors include financial risk, equipment, integration into the client's organisation, and whether the contractor works for multiple clients.
Status Determination Statement (SDS)
Medium/large clients must issue a written Status Determination Statement giving the conclusion and reasoning, and pass it down the supply chain. Contractors and agencies have a right to challenge it via a client-led disagreement process.
Consequences of getting it wrong
- Inside IR35 missed — the fee-payer (or the PSC for small-client engagements) is liable for unpaid PAYE, NI, interest and penalties.
- Set-off relief — since April 2024, HMRC offsets tax already paid by the contractor on the same income, reducing the liability to the difference.
Practical tips for contractors
- Review every contract and the actual working practices, not just the paperwork.
- Keep evidence: substitution clauses actually used, invoices to multiple clients, your own kit, project-based deliverables.
- Get an independent IR35 review for high-value engagements.
General guidance, not tax advice. Speak to a qualified accountant for advice tailored to your situation. Figures relate to the 2025/26 UK tax year. Source: HMRC, gov.uk.
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