What is IR35? A Guide for UK Contractors

IR35 impact on contractors is significant, determining whether freelancers working through limited companies pay tax as employees or genuine contractors, affecting take-home pay by up to 25% through additional National Insurance and loss of expense deductions when caught inside IR35 rules.

Last updated Apr 14, 2026

24 min read

Written by Jordan MaceyMAAT

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If you’ve ever had a contract classed as “inside IR35” and watched your take-home pay drop before it even reaches your bank account, you know just how harsh these rules can be. For UK contractors, IR35 is one of the most important and most misunderstood pieces of tax law in existence. Get it right and you hold onto more of your income. Get it wrong, and HMRC can hit you with a bill for years of back taxes, plus interest and penalties.

This guide covers everything you need to know about IR35. It includes answers to most common questions like; what is IR35, how it works, what’s changed, and what steps you can take now to keep more of your contracting earnings. Whether you’re brand new to contracting or you’ve been contracting for ages, you’ll find everything in this guide.

What is IR35?

IR35 or Off-Payroll Working Rules, is UK tax legislation designed to stop what HMRC calls "disguised employment." It targets contractors who work in a similar way to employees but use a limited company or other intermediary to pay less Income Tax and National Insurance Contributions (NICs).

At the core of IR35 is one main question: If you ignore the contract and just look at how you actually work, would HMRC see you as your client’s employee? If the answer is yes, you’re “inside IR35” and you must pay tax at the same rates as a permanent employee. If not, you’re “outside IR35” and you can continue to take the tax advantages of genuine self-employment through your limited company.

Where did the name IR35 come from?

The name IR35 comes from press release number 35 published on 9 March, 1999 by Inland Revenue (now HMRC), when Gordon Brown was Chancellor. The rules came into effect on 6 April 2000. More than two decades later, it still remains one of the most debated and contentious area of UK tax law.

Who does IR35 apply to?

IR35 applies to contractors and freelancers who:

Provide services through their own limited company (also known as a Personal Service Company, or PSC)
Or work through another intermediary, such as a partnership

If you’re a sole trader, IR35 does not apply to you. HMRC has separate rules for you. IR35 is specifically affect people who use companies or similar setups to offer their services.

The classic example HMRC had in mind

When IR35 was introduced, HMRC aimed to stop a specific form of tax avoidance. An individual would work as a full-time employee, leave on a Friday, set up a limited company over the weekend, and return on Monday as a "contractor" doing essentially the same job. By routing their income through the company, they could pay themselves a low salary and take the rest as dividends, saving pounds in Income Tax and NICs each year.

IR35 was designed to close that loophole. The challange, and the reason why IR35 remains controversial, is that the line between genuine self-employment and disguised employment is often unclear.

Inside IR35 vs Outside IR35

If you work in contracting, you hear “inside IR35” and “outside IR35” all the time. But what do these terms really mean for your work life and more importantly, your finances?

Outside IR35

When your contract is outside IR35, HMRC considers you a genuine self-employed person. You can pay yourself through your limited company in the most tax-efficient way, typically by drawing a low salary and taking additional income as dividends. Dividends are taxed at lower rates than employment income and are not subject to National Insurance. This is why many contractors aim to take income this way where possible.

Inside IR35

If your contract falls inside IR35, HMRC treats you as a “deemed employee” for tax purposes even though you aren’t technically on the client’s payroll. You must pay Income Tax and NICs on your contract income, just like a regular employee. Your limited company still exists, but the tax advantages of operating through it effectively disappear for that contract. The fee-payer (usually the agency or client) deducts PAYE tax and NICs from your payments before you receive them.

Real example: outside vs inside IR35

Say you’re a contractor charging £500 a day for 220 days a year. That’s £110,000 gross.

Outside IR35 (limited company):

After corporation tax on profits and drawing income as a combination of salary and dividends at 2025/26 rates, a contractor in this position can typically retain around £72,000 to £77,000 in take-home pay, depending on allowable expenses.

Inside IR35 (PAYE):

The same contractor, now subject to Income Tax and employee NICs at PAYE rates, with employer NICs also deducted from the assignment rate, can expect to take home approximately £58,000 to £62,000.

That’s a difference of £10,000 to £15,000 each year, even though you did the same work for the same pay. Over five years, that adds up to a huge amount lost.

Can you be inside IR35 for one contract and outside for another?

Yes. IR35 applies per contract, not per contractor. You could be outside IR35 for a project with one client on Monday and inside IR35 for a project with a different client starting Tuesday. Your status doesn’t carry over, so you need to review every new contract carefully. Don’t assume your IR35 status stays the same.

How is IR35 Status Determined?

HMRC looks at how you actually work, not just what your contract says. Inspectors look at both the written terms and the day-to-day working practices. If the two contradict each other, HMRC prioritise real-world behaviour.

3 primary tests shape every IR35 assessment.

1. Control

Does the client control how, when, and where you do your work?

If a client tells you what hours to work, which tools to use, which methods to follow, and where to sit, that points strongly towards an employment relationship and inside IR35.

A genuine contractor, by contrast, controls how they deliver the agreed outcome. The client cares about the result, not the method. You set your own hours, choose your own approach, and complete the work as you see fit.

Ask yourself: Could you push back if the client told you to change your approach without a contractual reason to do so? If the honest answer is no, that is a control red flag.

2. Substitution

Can you send a qualified substitute if you’re unavailable or simply don’t want to do the work?

A genuine right of substitution is one of the single most powerful indicators of outside IR35 status. Employees cannot send a someonein their place to do their job, independent contractors can.

But the substitution right must be real and unrestricted in the contract. If the contract says “substitution allowed only if the client approves every time,” the client can always deny it, making the clause meaningless.

Ask yourself: Does your contract genuinely allow substitution, and have you ever used it, or at least offered to? Evidence of actual substitution is very powerful in an HMRC investigation.

3. Mutuality of Obligation (MOO)

Is there an obligation to offer and accept work? In a standard employment relationship, the employer is obliged to provide work (or pay you anyway) and the employee is obliged to be present and complete the work. That mutuality is a hallmark of employment.

There is no expectation of continued work, no obligation to accept new tasks outside the agreed scope.

Ask yourself: Does your client assume you will be available to take on additional work whenever they need it? Are there undefined expectations around availability beyond the agreed contract? If yes, MOO could be an issue.

Other factors HMRC considers

Beyond the three core tests, HMRC also looks at these factors to build the overall view of whether you act as a genuine contractor or an employee in disguise. Here is the full list of what HMRC will look through when assessing IR35.

Financial risk

Do you take on real financial risk?

Contractors can make a profit or a loss on a project
Employees get paid regardless of outcome

If you fix mistakes at your own cost or risk losing money, that supports an outside IR35 position

Provision of equipment

Who provides the tools you use?

Using your own laptop, software, or equipment supports contractor status
Using only client-provided equipment points towards employment

Exclusivity

Do you work for multiple clients or just one?

Multiple clients support independence
Long-term exclusive work with one client can raise concerns

This factor alone does not decide status, but it adds weight to HMRC’s view

Integration into the organisation

How embedded are you in the client’s business?

Signs of employment include:

Company email address
Listing on the company website
Attending staff meetings as a team member
Having a permanent desk

The more you look like part of the organisation, the more likely HMRC sees you as an employee

Final point

No single factor decides IR35 status. HMRC looks at the full picture. Strong indicators, such as a genuine right of substitution, can outweigh weaker areas.

This is why professional contract reviews matter. They assess both your contract and real working practices, giving you a more reliable position than generic online tools.

Who Decides Your IR35 Status?

Over the past decade, IR35 has seen major changes, particularly about who decides your status and who carries the liability if they get it wrong.

Public sector clients (since April 2017)

If you work for a public sector organisation, such as the NHS, a government department, or a local authority:

The client decides your IR35 status
They must issue a Status Determination Statement (SDS)
The fee-payer (usually an agency) applies PAYE if you are inside IR35

Private sector medium and large companies (since April 2021)

The same rules apply if your client is a medium or large private company.

A client is classed as medium or large if it meets at least two of these:

Turnover above £15 million
Balance sheet above £7.5 million
More than 50 employees

In this case:

The client decides your IR35 status
The fee-payer handles tax deductions if required

Small company exemption

If your client is a small company, meeting fewer than two of above thresholds, the responsibility for determining IR35 status falls back to you, the contractor.

This means:

You assess your own IR35 status
You apply the standard IR35 tests to each contract

Recent threshold increases mean more businesses now qualify as small. As a result, more contractors will need to assess their own status, especially going into the 2026/27 tax year.

What is a Status Determination Statement (SDS)?

When a medium or large client determines your status, they must give you a written SDS. This document must:

State whether you are inside or outside IR35
Give clear reasons for the determination
Be passed along the contractual chain (e.g., to the agency as well as to you)

You can challenge an SDS if you believe it is incorrect.

Submit your disagreement in writing with evidence
The client must respond within 45 days
If they fail to respond, liability can shift back to them

Overseas clients

If your client is fully based overseas with no UK presence:

You usually decide your own IR35 status

However, this area can be complex. If the client has a UK office, a UK subsidiary, or provides services in the UK, the standard rules may still apply. Get professional advice before assuming you are outside the rules.

IR35 Changes: A Timeline from 2000 to 2025/26

IR35 has changed significantly since it was first introduced. Here is the full picture.

April 2000 - IR35 comes into effect. Contractors must decide their own employment status. Low compliance levels frustrate HMRC over the following decade.

April 2017 - Off-payroll working rules are introduced in the public sector. Public bodies must now decide contractors’ status and issue Status Determination Statements. Liability for wrong decisions shifts to the fee-payer.

September 2022 - The Liz Truss government’s mini-budget announces a full repeal of the 2017 and 2021 IR35 reforms, aiming to return responsibility to contractors. Contractors and agencies welcome the news.

October 2022 - The repeal is reversed within weeks. The reforms stay in place.

April 2021 - Off-payroll rules extend to the private sector for medium and large companies. This affects more contractors, bringing around 60,000 more engagements into scope.

April 2024 - The Offset Rule comes into effect. This is a key change for both clients and contractors. If HMRC challenges an outside IR35 decision and PAYE is owed, it must offset taxes already paid by the contractor’s company, including Corporation Tax and dividend tax. This removes the issue of the same income being taxed twice.

April 2025 - Small company thresholds are updated. The turnover limit increases from £10.2m to £15m, and the balance sheet limit rises from £5.1m to £7.5m. Employer NICs increase from 13.8% to 15%, and the secondary threshold drops from £9,100 to £5,000 per year. This makes inside IR35 roles more expensive for clients and puts pressure on day rates.

April 2026 - Umbrella company reforms. Joint and Several Liability apply across umbrella supply chains, meaning agencies and end clients are responsible for unpaid tax by non-compliant umbrella companies. If you work through an umbrella company, now is the time to check its compliance.

What Does IR35 Mean for Your Take-Home Pay?

Let’s talk numbers, because that’s what most contractors care about: how much does IR35 really cost you?

Here’s a quick, practical example using a contractor earning £500 a day in the 2025/26 tax year. If you work 220 days, that’s £110,000 in gross contract income.

Scenario A — Outside IR35, limited company

You pay yourself a director’s salary of £5,000 (matching the NIC secondary threshold for 2025/26, the sweet spot to keep both employer and employee NICs at zero). The rest of the profit, after Corporation Tax (19% on the first £50,000, with marginal relief above), is drawn as dividends. With current tax rates and some typical business expenses, your take-home is around £72,000 to £76,000.

Scenario B — Inside IR35, umbrella company

Same contract value, but it’s paid through an umbrella company under PAYE. Here’s the pain: employer NICs at 15% (from April 2025) are deducted from your contract rate first. Then you pay employee NICs and Income Tax. Add umbrella fees (usually £25–£40 per week), and your take-home drops to between £57,000 and £62,000.

That’s roughly a gap of £14,000 to £16,000 a year. If you’re outside IR35, that’s money in your pocket. If you’re inside, it goes straight to HMRC.

If you want to check your own numbers, use GoForma’s IR35 take-home calculator. It shows exactly where you stand, inside or outside IR35, based on your day rate.

The impact of the April 2025 NIC changes

From April 2025, employer National Insurance increased from 13.8% to 15%. At the same time, the threshold at which these contributions start dropped from £9,100 to £5,000 per year.

For contractors working inside IR35, this has a direct impact. Employer National Insurance is taken from the contract rate before your take-home pay is calculated. On a £110,000 contract, this change alone can reduce your take-home by around £1,500 to £2,000 per year compared to 2024/25.

For clients, the higher National Insurance cost makes hiring inside IR35 more expensive. Some have responded by lowering day rates to offset this increase, so it is important to factor this in when negotiating new contracts.

The limited company outside IR35

Outside IR35, contractors typically use a simple and tax-efficient structure:

Draw a director’s salary of around £5,000 (the 2025/26 NIC secondary threshold). You pay no employee or employer NICs on this amount, and it reduces the company's Corporation Tax bill.
Take the remaining profit as dividends after Corporation Tax. Dividend tax rates are 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate), which are all meaningfully lower than equivalent employment income tax rates.
Claim allowable business expenses through the company, such as professional subscriptions, accountancy fees, home office costs, and business travel. These reduce your taxable profit.

This structure is fully legal, widely used, and designed for limited company contractors. The key requirement is that your contract must genuinely sit outside IR35.

Important: These figures are examples only. Your actual take-home depends on your expenses, other income, pension contributions, and overall situation. Speak to a GoForma's contractors accountant for a personalised calculation.

What Are the Penalties for Getting IR35 Wrong?

IR35 mistakes can be costly. Whether you are a contractor who self-assessed incorrectly on a small company contract, or a client whose status determination has been challenged by HMRC, the financial consequences can be severe.

For contractors (where self-assessment applies)

If HMRC investigates and decides your contract should have been inside IR35, you may face:

100% of unpaid Income Tax and National Insurance, backdated to when the issue started
Interest on the unpaid amount from the original due date
Penalties on top of it, based on behaviour:
- 30% of unpaid tax if HMRC decides you were careless but genuinely did not know
- 70% of unpaid tax if HMRC decides you knew you were inside IR35 but chose not to act
- 100% of unpaid tax if HMRC finds you actively tried to hide your employment status

HMRC can usually look back up to six years. In cases of suspected fraud, this extends to 20 years.

For clients and fee-payers (medium/large companies and public sector)

Under the post-2021 off-payroll rules, clients who issue an incorrect outside IR35 determination are liable for:

Unpaid PAYE
National Insurance
Apprenticeship Levy

Penalties follow the same 30% to 100% scale depending on the nature of the error.

In real terms, a £500 per day contractor over one year can create a liability of £31,746 to £48,840, before interest and additional charges.

Real cases show HMRC takes IR35 seriously

HMRC has issued huge penalties for IR35 failures in the public sector:

Department for Work and Pensions: £87.9 million - it used HMRC’s CEST tool incorrectly between 2017 and 2021
Home Office: £33.5 million, including a £4 million penalty
NHS: £4.3 million for getting contractor assessments wrong

These are not rare mistakes. These are large government departments with legal teams and full access to HMRC guidance. If they can get it wrong, anyone can. The takeaway is simple: IR35 is a serious responsibility, not something you can treat lightly.

The Offset Rule: one important protection for clients

Since April 2024, the rules are a bit fairer for clients.

If HMRC challenges an outside IR35 decision and wins, it must now offset any taxes already paid by the contractor's PSC. This includes Corporation Tax and dividend tax.

This change helps prevent double taxation, which used to be a major concern for businesses.

However, it does not remove the risk. You still need to get IR35 decisions right from the start.

How to Protect Yourself: Practical Steps for Contractors

IR35 is not a lottery. You can take clear steps to stay compliant, and GoForma helps contractors do this every day.

Get every contract reviewed by a professional

Before you sign a contract, ask an IR35 specialist or contractor accountant to review it.

They check both:

the contract wording
how you actually work

HMRC looks at both. If your contract says one thing but your working practice shows another, it can hurt your case.

At GoForma, we review every key clause and your real working setup. You get a clear, written view of your IR35 status.

Use HMRC’s CEST tool (but don’t rely on it alone)

HMRC provides a free tool called CEST (Check Employment Status for Tax).

It asks questions about your work and gives one of three results:

inside IR35
outside IR35
"it is not possible to determine the status"

HMRC will stand by the result if your answers are correct. But the tool has limits:

it does not fully assess Mutuality of Obligation (MOO)
it simplifies complex situations into basic outcomes

Use it as a starting point, not the final answer. Always back it up with expert advice.

Know how to challenge an SDS

If a client gives you an inside IR35 Status Determination Statement (SDS) and you disagree, take action.

Put your challenge in writing
Explain clearly why it is wrong
Refer to key tests like control, substitution, and MOO

The client must reply within 45 days. If they do not, the liability shifts back to them.

Keep records of emails, dates, and responses.

Maintain thorough working practice records

Your records are your defence if HMRC ever opens an investigation. Keep:

Signed contracts for every engagement
Evidence of substitute offers or actual substitutions
Invoices and payment records
Records showing you work for multiple clients (reduces single-client dependency concerns)
Evidence of using your own equipment
Notes of project-based working (start, deliverable, end)
Any written communications that support your independent contractor status

HMRC can request records back up to six years. Strong records make a big difference.

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Consider IR35 insurance

IR35 insurance can cover:

the cost of defending an HMRC investigation
in some cases, the tax if you lose

For most contractors, the yearly cost is small compared to the risk. It is a practical business expense.

Work with a specialist contractor accountant

This is one of the best steps you can take.

A specialist contractor accountant will:

review your contracts
monitor your IR35 position
keep up with HMRC guidance
warn you about risks early

HMRC also considers “reasonable care” when deciding penalties. Taking professional advice and following it can reduce what you owe if issues arise.

Speak to a GoForma contractor accountant today. Our team works with hundreds of UK contractors and understands the nuances of IR35 across a wide range of industries and contract types.

IR35 and Umbrella Companies

If your contract falls inside IR35, most contractors choose to work through an umbrella company instead of their own limited company.

How an umbrella company works

An umbrella company employs you directly.

Here’s what happens:

You complete work for a client or agency
The agency pays the umbrella company
The umbrella deducts employer NICs and its fee
The rest goes through PAYE
You receive a payslip and net salary

You pay Income Tax and employee NICs like a normal employee. You also get basic employment rights such as holiday pay and statutory sick pay.

For inside IR35 roles, this setup is usually simpler than running a limited company under PAYE. The umbrella handles payroll, and you avoid extra admin.

What to watch out for

Not all umbrella companies are compliant.

One common risk is mini-umbrella company fraud. This involves moving contractors through multiple small companies to misuse tax allowances. HMRC actively investigates these schemes.

Even if you are unaware, you could still face tax issues later.

To stay safe:

Choose umbrella companies linked to recognised bodies like FCSA or Professional Passport. Refer our list of 10 Best UK Umbrella Companies in 2026
Make sure your pay goes through a clear, standard PAYE system
Avoid any setup that looks overly complex or unclear

If something feels off, it usually is.

April 2026 changes: stricter rules

From April 2026, Joint and Several Liability now applies across umbrella supply chains.

Under Joint and Several Liability:

If the umbrella fails to pay the correct tax
The liability can pass to the agency
It may even reach the end client

This means agencies and clients will be far more careful about who they work with.

What you should do now

If you already use an umbrella company:

Check their compliance status
Ask how your pay is processed
Request clear, written explanations

If they cannot give simple, transparent answers, treat it as a red flag.

Ready to sort your IR35 position? GoForma can help

GoForma works with hundreds of UK limited company contractors every year. Our specialist contractor accountants understand IR35 fully, from the rules and case law to CEST and Status Determination Statements.

Whether you want a contract checked before you sign, need clarity on your current status, or want an accountant who understands how you actually work, we are here to help. Speak to a GoForma contractor accountant today!

IR35 Frequently Asked Questions

What is IR35 in simple terms?

IR35 is a UK tax rule that checks if you are really self employed or working like an employee through a limited company. If you work like an employee, you must pay tax like one. It aims to stop “disguised employment”. In simple terms, it makes sure people pay the right tax.

What does IR35 mean for contractors?

IR35 decides how you pay tax on your contract work. If you fall inside IR35, you pay Income Tax and National Insurance like an employee. If you are outside IR35, you can take income in a more tax efficient way. It directly affects your take home pay.

Why was IR35 introduced?

The government introduced IR35 to stop tax avoidance through limited companies. Some workers acted like employees but paid less tax. IR35 ensures they pay similar tax to regular employees. It creates a fairer tax system.

What is disguised employment under IR35?

Disguised employment happens when you work like an employee but operate through a company. You may have fixed hours, no real independence, and no business risk. IR35 treats this as employment for tax purposes. You then pay tax as an employee.

Does IR35 apply to sole traders?

No. IR35 only applies to contractors who work through an intermediary, usually a limited company or PSC. Sole traders pay tax as self employed individuals under different rules, so IR35 does not apply to them.

Can I appeal an IR35 determination?

Yes. If your client gives you a Status Determination Statement that you think is wrong, you can challenge it in writing. Explain your reasons clearly and refer to the key tests and your actual working setup. The client must reply within 45 days. If they do not reply, the liability moves back to them. If you still disagree after their review, you can take the case to an employment tribunal or the First tier Tax Tribunal.

What is the CEST tool and should I rely on it?

CEST means Check Employment Status for Tax. It is HMRC’s free online tool to assess IR35 status. HMRC will accept the result if you give accurate information. However, the tool has limits. It does not properly cover Mutuality of Obligation and often cannot give a clear result. Use it as a guide, not a final answer, and always get expert advice.

What happens if my client goes into administration?

Things can get complicated if the client or fee payer becomes insolvent. Responsibilities and liabilities do not disappear. In this situation, it is important to get advice from a contractor specialist accountant. Speak to GoForma for support if this happens.

Does IR35 apply to overseas clients?

If your client is fully based outside the UK and has no UK presence, the off payroll rules do not apply and you decide your own IR35 status. But if the client has any UK connection, such as an office or operations, the usual rules may still apply. This area can be complex, so it is best to get professional advice.

How far back can HMRC investigate?

HMRC can usually check your tax records going back six years. If they believe you have deliberately hidden information or filed incorrect returns, they can go back up to 20 years. This is why keeping clear and complete records is so important.

Is IR35 the same as the off payroll working rules?

Effectively, yes. "IR35" is the colloquial term used by almost everyone in the contracting sector. "Off-payroll working rules" is the official HMRC terminology used in legislation and guidance. They refer to the same underlying framework. You will sometimes see IR35 used to mean the original 2000 legislation and off-payroll to refer specifically to the 2017/2021 reforms, but in everyday use, the terms are interchangeable.

What happens if I am inside IR35?

If you are inside IR35, you pay tax like an employee. Your income goes through PAYE with Income Tax and National Insurance deducted. You may also lose some tax benefits of a limited company. This reduces your net income.

How much tax do you pay inside IR35?

You pay standard Income Tax and National Insurance rates. The exact amount depends on your income level. In most cases, your take home pay is lower than outside IR35. You also cannot use dividends in the same way.

Do you pay more tax inside IR35?

Yes, you usually pay more tax inside IR35. You pay employee level taxes without receiving full employee benefits. This reduces your overall earnings. That is why status matters.

What is the difference between inside and outside IR35?

Inside IR35 means you are taxed like an employee. Outside IR35 means you operate as a genuine business. You can take income more flexibly outside IR35. The difference mainly affects tax and control over your work.

Will IR35 be abolished?

No. As of 2026, there are no plans to scrap IR35. The Labour government has not announced any changes to remove it. There may be future discussions about employment status rules, but any changes will take time. For now, IR35 remains in place.

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Disclaimer:

This article was written by the Jordan Macey, and reviewed by a Noor Fiaz. It is last updated in April 2026 to reflect 2025/26 tax rates and legislative changes. For advice specific to your situation, please contact GoForma directly.