IR35 is HMRC's off-payroll working legislation, designed to ensure that contractors who work like employees pay broadly the same Income Tax and National Insurance (NI) as employees. If HMRC determines that your engagement falls inside IR35, the fee-payer (your agency or end client) must deduct tax and NI from your fees as if you were employed.
An incorrect IR35 determination can result in a tax bill covering multiple years, including back-taxes, interest, and penalties. Getting this right matters enormously.
What is IR35?
IR35 was introduced in April 2000 to tackle "disguised employment": arrangements where a worker provides services through a personal service company (PSC) but is, in reality, working as an employee of the client. The rules require that tax be collected as if the worker were directly employed, even though a company structure sits in the middle.
Who does IR35 apply to?
IR35 applies to you if:
- You provide services through a personal service company (PSC) or similar intermediary
- You work for an end client (not directly employed by them)
- The nature of the engagement would be employment if the intermediary were removed
If you operate through an umbrella company, IR35 does not apply in the same way because you are already treated as an employee of the umbrella.
Inside vs outside IR35
| Status | What it means | Tax treatment |
|---|---|---|
| Outside IR35 | You are a genuine business operating independently | Your company receives fees; you pay Corporation Tax, then take salary and dividends |
| Inside IR35 | The engagement resembles employment | The fee-payer deducts PAYE tax and NI before paying you; only a 5% administration allowance applies |
Who decides IR35 status?
Responsibility for making the status determination changed significantly in 2017 and 2021:
- Public sector (from April 2017): The end client (the public authority) is responsible for determining status and the fee-payer deducts tax accordingly.
- Medium and large private sector (from April 2021): The end client is responsible for issuing a Status Determination Statement (SDS). Small companies are exempt, and in those cases the contractor remains responsible for their own determination.
- Small private sector clients: The contractor remains responsible for determining their own IR35 status.
The key tests used to determine IR35 status
HMRC and the courts apply several tests to decide whether an engagement is inside or outside IR35. No single factor is decisive; the overall picture matters.
- Substitution: Can you send a substitute to do the work? A genuine right of substitution (with evidence it has been exercised or is genuinely available) points strongly outside IR35.
- Mutuality of obligation (MOO): Is the client obliged to offer work and are you obliged to accept it? An obligation on both sides is an indicator of employment.
- Control: Does the client control how, when, and where you work? High levels of control point towards employment.
- Financial risk: Do you bear financial risk, such as correcting faulty work at your own cost?
- Part and parcel of the organisation: Do you appear as a regular employee (staff directory, regular desk, invited to company events)?
The financial impact of being inside IR35
If you are inside IR35 and operate through a PSC, you will pay significantly more tax. Under the deemed payment calculation, your gross fees are treated as gross employment income. Employers' NI (15% in 2025/26) is deducted, and then Income Tax and employees' NI are applied to the remainder. You can retain only a 5% allowance for company running costs.
In practice, an inside IR35 engagement through a PSC typically results in a take-home pay broadly equivalent to being directly employed, but with the added overhead of running a company.
CEST: HMRC's status tool
HMRC provides a free online tool called Check Employment Status for Tax (CEST) that provides a status determination you can use as evidence. CEST is not perfect (it has been criticised for failing to properly assess MOO) but its determinations are binding on HMRC if you answer honestly. Use it as one input among several, not as the definitive answer.
This guide provides general information only. IR35 is complex and the consequences of getting it wrong are significant. Always seek specialist advice from a qualified tax adviser. Find one via our accountant directory.