Updated October 2026. Facts are taken from HMRC guidance on GOV.UK, linked throughout.
IR35, also called the off-payroll working rules, makes sure that a contractor working through their own limited company pays broadly the same Income Tax and National Insurance as an employee would, where they would have been an employee if engaged directly by the client. This guide explains how the rules work for contractors and for the businesses that engage them.
Who the rules apply to
The rules can affect (HMRC: Understanding off-payroll working):
- workers who provide services through their own intermediary, usually a limited company known as a personal service company (PSC), a partnership or another individual
- clients who receive those services
- agencies and other suppliers in the chain
If you are employed by an umbrella company, the off-payroll rules are unlikely to apply.
Who decides whether IR35 applies?
- Public sector clients decide the worker’s employment status for tax. This includes government departments, local authorities, schools, universities and the NHS.
- Medium and large private and voluntary sector clients decide. A client is medium or large if it meets 2 or more of the size conditions for turnover, balance sheet total and more than 50 employees. Group rules can bring subsidiaries in.
- Small private sector clients do not decide. The contractor’s own company must assess each contract and decide whether IR35 applies.
- Clients based wholly overseas are outside the rules, but the contractor’s company must then decide.
A small client must confirm its size if the contractor or agency asks. See HMRC’s guidance on off-payroll working for clients.
Status determination statements
Where the client decides, it must take reasonable care and give the worker and the agency a status determination statement (SDS) with the reasons for its decision, whether the rules apply or not. If it does not, the client becomes liable for the worker’s Income Tax and National Insurance.
The rules apply contract by contract, based on both the written terms and the actual working practices. If either changes, the status should be checked again.
If you disagree with a determination
Clients must have a process for considering disagreements. A worker or deemed employer can raise one at any time until the last payment for the engagement. The client must respond within 45 days, either confirming its decision with reasons or issuing a new one. The original determination applies in the meantime. If the client does not respond in time, it becomes liable for the tax and National Insurance.
What happens if a contract is inside IR35?
- The deemed employer, usually the agency paying your company or the client if there is no agency, deducts Income Tax and employee National Insurance from fees paid to your company.
- The deemed employer pays employer National Insurance and, where relevant, the Apprenticeship Levy.
- Student and postgraduate loan repayments are not deducted, so you will need to file a Self Assessment return to pay them.
- Your company should record the income correctly so it is not taxed twice. We make sure this is handled properly in your accounts.
Checking employment status
HMRC’s Check Employment Status for Tax (CEST) tool gives HMRC’s view of a worker’s status, based on the information entered. HMRC says it will stand by the result as long as the information is accurate and the tool is used in line with its guidance. The key factors include:
- substitution: whether you can send someone else to do the work
- control: who decides how, when and where the work is done
- financial risk: whether you invest in the business or risk losing money
- part and parcel: whether you are treated like an employee of the client
Beware of avoidance schemes
HMRC warns about schemes that wrongly claim to get around the off-payroll rules, often promising unusually high take-home pay. Check HMRC’s guidance on tax avoidance schemes aimed at contractors and agency workers before signing up to anything.
How Taxlab can help
- IR35 contract and working-practice reviews
- help assessing status where your company is responsible (small or overseas clients)
- support challenging a status determination you disagree with
- correct accounting for inside-IR35 income
- advice on limited company or umbrella options
See our contractor accountancy services and CIS services.
Get in touch
Contact us, call 0845 862 6009 or message us on WhatsApp.
This page gives general information only and does not constitute professional advice.