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IR35 Basics Updated 26 February 2026

What Is IR35? The Plain English Guide for UK Contractors

What Is IR35? The Plain English Guide for UK Contractors

IR35 is the single biggest factor affecting how much money you take home as a UK contractor. Despite that, most explanations are written by lawyers for lawyers. This guide is different.

IR35 in One Paragraph

IR35 is tax legislation that looks at how you actually work — not what your contract says — to decide whether you are genuinely self-employed or really a disguised employee. If HMRC (or your end client) decides you are effectively an employee, you pay income tax and National Insurance at employee rates, wiping out most of the financial benefit of contracting through a limited company.

Why It Exists

Before IR35, a worker could sit at the same desk, do the same job, and report to the same manager as a permanent employee — but pay significantly less tax by invoicing through a personal limited company. The government introduced the Intermediaries Legislation in April 2000 to close that gap.

The original rules put the responsibility on the contractor to assess their own status. In practice, many contractors self-assessed as outside IR35 regardless of their actual working arrangements.

What Changed in April 2021

The off-payroll working rules shifted responsibility for IR35 status determinations from the contractor to the end client for medium and large businesses in the private sector. This was the biggest change to contracting in two decades.

Under the current rules:

  • Medium and large private sector clients must assess your IR35 status and issue a Status Determination Statement (SDS)
  • Small private sector clients leave the responsibility with the contractor
  • All public sector clients have been under these rules since April 2017
  • The fee-payer (usually the agency) must deduct tax if the determination is inside IR35

The Three Tests That Matter

Tribunal case law has established three key tests for IR35 status:

1. Control

Does the end client control how you do the work, when you do it, and where you do it? The more control they have, the more it looks like employment.

2. Substitution

Do you have a genuine right to send a substitute — someone else to do the work in your place? If only you can do the work, that points towards employment.

3. Mutuality of Obligation

Is there an obligation on the client to offer you work and an obligation on you to accept it? A genuine contractor can turn down work without consequence.

No single factor is decisive. Tribunals look at the overall picture, and other factors like financial risk, provision of equipment, and being in business on your own account all play a part.

Inside vs Outside: The Financial Impact

The difference between an inside and outside IR35 determination is significant. On a typical £500 per day contract:

  • Outside IR35 — You invoice through your limited company, pay yourself a mix of salary and dividends, and retain more of your earnings through legitimate tax planning
  • Inside IR35 — Tax and National Insurance are deducted at source by the fee-payer, leaving you with take-home pay similar to a permanent employee at the same rate

The exact difference depends on your personal circumstances, but contractors inside IR35 typically take home 20 to 25 percent less than those outside.

What You Should Do Now

  1. Understand your working practices — Look honestly at how you work, not just what your contract says
  2. Review your contract — Make sure it reflects the reality of how you deliver the work
  3. Get your status assessed — Use HMRC’s CEST tool as a starting point, but be aware of its limitations
  4. Keep evidence — Document your working practices, especially around substitution rights and control
  5. Take professional advice — If you are unsure, speak to an IR35 specialist before your next contract renewal

Frequently Asked Questions

What does IR35 mean?

IR35 refers to the Intermediaries Legislation introduced in 2000. It targets contractors who work through an intermediary (usually a limited company) but would otherwise be considered an employee. The name comes from the original Inland Revenue press release number.

How do I know if I am inside or outside IR35?

Your IR35 status depends on the actual working relationship, not what the contract says. Key factors include control over how you do the work, the right to send a substitute, and whether you are in business on your own account. Since April 2021, medium and large end clients must assess your status.

What happens if I am inside IR35?

If your engagement is inside IR35, tax and National Insurance are deducted at source before you are paid, similar to an employee. You lose the tax advantages of working through a limited company, which typically reduces your take-home pay by 20 to 25 percent.

Can I challenge an IR35 determination?

Yes. If your end client determines you are inside IR35 and you disagree, you can use the client's status disagreement process. If that does not resolve it, you can take the matter to a tax tribunal, though this is costly and time-consuming.

Does IR35 apply to small companies?

The off-payroll working rules do not apply to engagements with small companies in the private sector. For small companies, the contractor remains responsible for determining their own IR35 status. A company is small if it meets two of three criteria: turnover under £10.2 million, balance sheet under £5.1 million, or fewer than 50 employees.