What is IR35? IR35 Rules Explained
The off-payroll working rules, the three key status tests, and what being inside or outside IR35 means for contractors
This guide is part of our IR35 Hub — your complete IR35 resource centre.
IR35 became law in 2000 via the Finance Act, and is another name for the off-payroll working rules. It affects all contractors who work through a limited company and do not meet HMRC’s definition of self-employment. Your IR35 status determines how you are taxed and can mean a difference of thousands of pounds in annual take-home pay.
Below we explain what inside and outside IR35 mean, the three tests HMRC uses to determine your status, and who is responsible for making the determination since the 2021 reforms.
What do ‘inside IR35’ and ‘outside IR35’ mean?
Inside IR35
If you are determined to be ‘inside IR35’ this means you do not meet HMRC’s definition of self-employed. You are considered an employee of the end client and are therefore subject to PAYE, requiring you to ensure that you are paying the appropriate taxes.
Find out more about what being inside IR35 means here.
Outside IR35
If you are determined to be ‘outside IR35’ this means you meet HMRC’s definition of self-employed. You are considered a genuine business and can operate and be engaged with as an independent contractor. You would be paid gross for any work completed.
Find out more about what being outside IR35 means here.
How Inside vs Outside IR35 Affects Your Take-Home Pay
The financial difference between being inside and outside IR35 is significant. On a £60,000 annual contract, the approximate take-home pay comparison is:
Outside IR35
Inside IR35
The 3 Key IR35 Status Tests
There are three key factors taken into consideration when assessing a contractor’s working arrangement to determine whether they are inside or outside IR35.
1. Right of Substitution
Substitution is the ability of a contractor providing a contracted service to supply a replacement contractor to carry out the service under the contract. If you have a genuine, unfettered right to send someone else in your place, this points towards being outside IR35.
2. Mutuality of Obligations (MOO)
MOO means that in order for an employment relationship to exist, there must be an obligation on a work-provider to provide work and an obligation on the individual to carry out the work. If there is no obligation on either side between engagements, this suggests an outside IR35 status.
3. Control
Control looks at whether a worker is truly independent when working under a contract between it and the end-client. The more factors showing independence of work behaviour, choice of how and when to work etc., indicate a scenario where IR35 does not apply.
What is HMRC’s definition of self-employed?
Bids and Quotes
They put in bids or give quotes to get work
No Direct Supervision
They’re not under direct supervision when working
Submit Invoices
They submit invoices for the work they’ve done
Tax Responsibility
They’re responsible for paying their own National Insurance and tax
No Holiday or Sick Pay
They do not get holiday or sick pay when they’re not working
Contract Terms
They operate under a contract that uses terms like ‘self-employed’, ‘consultant’ or an ‘independent contractor’
IR35 Status Distribution: Statistics 2025
The following data shows the current state of IR35 compliance and its impact on UK contractors:
Key Statistics:
- 70% of contractors are determined to be outside IR35
- 25% fall inside IR35 and are subject to PAYE
- 5% have undetermined status pending review
- Average IR35 investigation costs contractors £15,000–£50,000
- IR35 insurance claims have increased by 40% since 2021 reforms
How has IR35 changed — and who decides your status now?
IR35 has undergone a number of changes over the past few years and continues to evolve to this day. The most important change for contractors is who decides whether you are inside or outside IR35.
Public sector IR35 reform in April 2017
In April 2017, IR35 reform in the public sector came into force. This meant that IR35 status was no longer decided by the contractor, but was decided by public sector clients instead. If the client decided that the contractor was inside IR35, the contractor company would be taxed at source, exactly as if it were an employee.
Private sector IR35 reform in April 2021
In April 2021, IR35 reform in the private sector came into force, after being delayed by a year due to the covid-19 pandemic. As with the public sector IR35 reforms, this meant IR35 status was no longer decided by contractors working in the private sector, but by their clients instead. Medium and large clients must now issue a Status Determination Statement (SDS) to contractors.
Will IR35 reforms be repealed from April 2023?
Unfortunately the IR35 reforms will not be repealed from April 2023.
In the Mini-Budget of September 2022, the UK government announced fundamental changes to IR35, repealing the public sector IR35 reforms of April 2017 and the private sector IR35 reforms of April 2021. However, on 17th October 2022 the new chancellor Jeremy Hunt reversed the government’s pledge to repeal IR35 reform.
You can read a full timeline of how IR35 has changed since it came into force in 2000 here.
Protect yourself with IR35 insurance
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Coverage includes: HMRC investigation costs, legal fees, expert representation, and potential tax liability protection.
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Get IR35 Contract Review →Frequently Asked Questions About IR35
Inside IR35 means HMRC considers you a disguised employee — you pay tax and National Insurance through PAYE, reducing your take-home pay by 20–30%. Outside IR35 means you are genuinely self-employed and can be paid gross through your limited company, retaining more of your earnings.
Since the 2021 reforms, medium and large private sector clients and all public sector clients are responsible for determining your IR35 status. They must issue a Status Determination Statement. If you work for a small private sector client, the responsibility remains with your own intermediary (usually your limited company).
Your IR35 status depends on three key factors: Right of Substitution (can you send a replacement?), Mutuality of Obligations (is there a mutual obligation to provide and accept work?), and Control (does the client control how, when and where you work?). You can use HMRC’s CEST tool or get a professional IR35 contract review.
On a typical £60,000 contract, being inside IR35 rather than outside can reduce your annual take-home pay by thousands of pounds due to additional income tax, National Insurance contributions and employer’s NI being deducted at source through PAYE. The exact difference depends on your expenses, pension and salary/dividend split.
If you’re inside IR35, you’ll be subject to PAYE tax and National Insurance contributions, similar to an employee. This means higher tax bills and potentially backdated payments if HMRC finds you should have been inside IR35 in previous years.
IR35 insurance is highly recommended as it covers the costs of HMRC investigations, legal fees, and potential tax liabilities. Given the complexity of IR35 rules and the risk of costly investigations, insurance provides valuable protection for your contracting business.
Major changes include the 2017 public sector reforms and 2021 private sector reforms, which shifted responsibility for IR35 status determination from contractors to their clients. These reforms have made IR35 compliance more complex and increased the need for professional advice.
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