IR35 is the UK's off-payroll working legislation. It targets contractors who work like employees but are paid through a personal service company (PSC) to avoid PAYE tax and National Insurance. HMRC introduced IR35 in 2000. If you are 'inside IR35', you are treated as an employee for tax purposes and your client deducts tax and NI at source. If you are 'outside IR35', you can take income through dividends and salary as a director, paying lower tax overall.

Who decides if a contract is inside or outside IR35?

For contracts with medium and large private-sector businesses (and all public-sector clients), the end client is responsible for determining your IR35 status since the off-payroll working reform of April 2021. For contracts with small private companies (two of: fewer than 50 staff, turnover under £10.2m, balance sheet under £5.1m), the contractor's own PSC remains responsible for the determination.

What are the key factors in an IR35 determination?

HMRC and courts assess three primary factors: (1) Substitution — can you send a substitute to do the work? A genuine right to substitute points outside IR35. (2) Control — does the client control how, when, and where you work? High control points inside IR35. (3) Mutuality of obligation — is the client obliged to offer work and you obliged to accept it? Continuous MOO points inside IR35. Other factors include financial risk, whether you supply your own equipment, and whether you are integrated into the client organisation.

How much more tax do you pay if inside IR35?

On a £500/day contract (approximately £120,000/year), an outside-IR35 contractor might take home £78,000-£85,000, while an inside-IR35 contractor takes home approximately £68,000-£72,000 — a difference of £10,000-£15,000/year. The exact difference depends on salary/dividend split, pension contributions, and allowable expenses.

What is the HMRC CEST tool?

CEST (Check Employment Status for Tax) is HMRC's free online tool to determine IR35 status. Completing CEST and following the result gives you some protection from retrospective challenge if you have answered questions accurately. However, CEST has been criticised for not adequately addressing mutuality of obligation and has been overridden by tribunal decisions. Many contractors use a specialist IR35 consultant or solicitor for formal status reviews.

IR35 Guide UK 2026: Inside vs Outside IR35 Explained

IR35 is the UK tax rule that determines whether contractors are taxed as employees. The 2026 IR35 rules place the status determination responsibility on the end client for medium and large businesses, meaning your client — not you — decides if you are inside or outside IR35 for most contracts.

What Is IR35?

IR35 is the UK’s off-payroll working legislation, introduced by HMRC in 2000 and significantly reformed in April 2021. The rules target disguised employment — where a worker operates through a limited company (personal service company, or PSC) but works in a way that is economically identical to employment.

The term “IR35” comes from the original Inland Revenue press release number 35.

Key concept: If you are inside IR35, your income from that contract is treated as employment income. Your client or their agency must deduct PAYE Income Tax and National Insurance before paying you. If you are outside IR35, you receive payment gross and manage your own tax through Self Assessment as a director/shareholder of your PSC.

Inside vs Outside IR35: Key Differences

Factor	Inside IR35	Outside IR35
Tax treatment	PAYE — tax deducted at source	Self Assessment — pay via tax return
NI contributions	Employer + Employee NI deducted	Class 4 NI only (via Self Assessment)
Dividend income	Not available from that contract	Available — typically tax-efficient
Take-home on £500/day	~£65,000-£72,000/year	~£78,000-£85,000/year
Employment benefits	Usually none (statutory minimum only)	None
Holiday/sick pay	No (unless client voluntarily provides)	No
Determination responsibility	End client (medium/large companies)	Your own PSC (small companies)

Who Determines Your IR35 Status?

Since the off-payroll reform of April 2021, the responsibility for IR35 determination is split:

Medium and large private-sector clients (and all public-sector bodies): The end client determines your status and issues a Status Determination Statement (SDS). If you disagree with the determination, you have a right to challenge it through the client’s formal dispute process.

Small private companies (meeting two of: fewer than 50 employees, turnover under £10.2 million, balance sheet under £5.1 million): Your PSC remains responsible for its own IR35 determination, as was the case before 2021.

The Three Primary IR35 Tests

HMRC and employment tribunals assess IR35 status using case law developed from the Employment Rights Act. Three factors carry the most weight:

1. Substitution

Can you genuinely send a qualified substitute to carry out the work if you cannot or will not? A real, exercised right of substitution — not just a theoretical contractual clause — points strongly outside IR35. If the client would refuse a substitute or if no substitution has ever occurred, this points inside IR35.

2. Control

Does the client control what you do, how you do it, when you work, and where you work? High control (set hours, client premises, supervised work) points inside IR35. Wide autonomy in method, hours, and location points outside.

3. Mutuality of Obligation

Is the client obliged to offer you continuing work, and are you obliged to accept it? Ongoing engagement with no gaps, automatic renewals, and an expectation of continuous work point inside IR35. Discrete project-based engagements with genuine breaks point outside.

Other Factors HMRC Considers

Factor	Inside IR35	Outside IR35
Equipment	Client provides	You supply your own
Financial risk	Paid regardless of outcome	Risk of cost overruns, defects
Integration	Part of the team, org chart, email sig	Clearly separate, project-based
Exclusivity	Working only for this client	Multiple concurrent clients
Correction of errors	At client expense	At your expense

Worked Example: Tax Comparison

Daily rate: £500 | Working days: 220/year | Gross income: £110,000

	Outside IR35	Inside IR35
Salary drawn (director)	£12,570	£110,000 (deemed)
Dividend	£70,000	£0
Tax payable (approx.)	£22,000	£36,000
NI payable (approx.)	£5,000	£17,000
Net take-home	~£83,000	~£67,000
Difference	—	~£16,000 less

Figures approximate for 2026/27. Excludes pension contributions and allowable expenses, which can reduce the gap.

The HMRC CEST Tool

CEST (Check Employment Status for Tax) is HMRC’s free online questionnaire. Completing it in good faith and following the result provides some protection from retrospective HMRC challenge.

Limitations of CEST:

The tool does not adequately assess mutuality of obligation
Tribunal decisions have overridden CEST results
Some questions have ambiguous interpretations
CEST only covers England and Wales (broadly applies in Scotland and NI too)

For contracts worth £50,000+/year, consider commissioning a formal IR35 review from a specialist contractor accountant or employment law solicitor.

Contractor Strategies for IR35

1. Genuine outside-IR35 practices:

Work for multiple clients concurrently
Genuinely exercise substitution (send a sub at least once)
Work from your own premises where possible
Use your own equipment
Carry your own professional indemnity insurance
Complete projects to a defined spec — do not be integrated into client teams

2. If inside IR35:

Maximise pension contributions via the client (some umbrella companies allow significant pension payments from the deemed employment cost)
Ensure you are on a legitimate umbrella company (many operate HMRC-compliant PAYE schemes)
Keep a working-from-home expense record if applicable

3. Avoid:

Signing a contract claiming outside IR35 status while actually working like an employee
Using non-compliant disguised remuneration schemes (HMRC actively targets these)
Ignoring a Status Determination Statement you disagree with — use the formal dispute process

IR35 and Umbrella Companies

If you are inside IR35, most agencies and clients will require you to work through an umbrella company — an intermediary employer that handles PAYE, NI, and statutory rights on your behalf. The umbrella takes a margin (typically £15-£40/week) and processes your pay as employment income.

Key points on umbrella:

Umbrella companies do not reduce your IR35 tax burden — they simply handle the admin
You receive statutory employment rights (holiday pay, statutory sick pay) via the umbrella
Beware non-compliant umbrella schemes that promise above-statutory take-home — HMRC pursues these aggressively

Written by WealthVieu

WealthVieu researches and writes data-driven personal finance guides using primary sources including the IRS, Bureau of Labor Statistics, Federal Reserve, and Census Bureau.

The content on Wealthvieu is for informational purposes only and should not be considered financial, tax, or investment advice. Consult a qualified professional before making financial decisions. Full disclaimer · Editorial policy