IR35 Explained: Rules, Status Tests & What Contractors Need to Know

What is IR35?

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.

The Inland Revenue had long perceived a problem of ‘disguised employment’ — its term for contractors being paid to undertake the same work as employees, but benefitting from a less taxing regime by operating through their own limited company or ‘personal service company’ (PSC). First tabled in 1999 by then-chancellor Gordon Brown, the legislation requires the creation of a ‘hypothetical contract’ by asking: if the individual worker was engaged directly by the end-client, what would that relationship look like? The answers can only be ‘Employment’ i.e. inside IR35, or ‘Self-employment’ i.e. outside IR35.

Inside IR35 vs outside IR35: what it costs you

If you are inside IR35, you do not meet HMRC’s definition of self-employed. You are considered an employee of the end client and are subject to PAYE. If you are outside IR35, your PSC’s invoice is paid gross — no tax and NICs deducted at source. All relevant business expenses can be claimed, and taking remuneration via a low salary and the remainder as dividends attracts neither employer nor employee National Insurance Contributions. As ContractorUK’s outside IR35 guide notes, this could enhance take-home pay by up to 30%.

On a £60,000 annual contract, the approximate take-home pay comparison is around £43,000+ outside IR35 versus £35,000 inside — a gap of roughly £8,000, and the gap widens at higher rates. Clients are increasingly aware of this: according to VIQU’s analysis on ContractorUK, the pay variance between inside and outside IR35 contracts has been heading for a 26% gap. Use our IR35 tax calculator for a side-by-side comparison on your own rate.

The three 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 to supply a replacement 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) — 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. The more factors showing independence of work behaviour — choice of how and when to work, for example — indicate a scenario where IR35 does not apply.

Tribunals also weigh factors such as financial risk, who provides the equipment, whether the contractor is ‘part and parcel’ of the client’s organisation, and whether they are genuinely in business on their own account. For more detail, see our IR35 status guides.

Who decides your IR35 status?

Currently, we have two IR35 decision-making regimes. PSCs engaged in the public sector or by a medium or large-sized company in the private sector have their IR35 status determined by the end-client, as a result of the ‘off-payroll working reforms.’ They must issue a Status Determination Statement (SDS) to contractors.

But the legislation has two key exemptions — PSCs engaged by ‘small companies’ as defined by the Companies Act, and PSCs whose engagers are based wholly overseas. PSCs whose clients fall into either camp are responsible for their own IR35 decision-making under Chapter 8. In both cases, the decision-maker must demonstrate ‘reasonable care,’ or they risk HMRC conferring upon them the tax and NIC liability, and even seeking to apply a penalty of 15–30% of the tax at stake.

IR35 changes in April 2026: the new small company thresholds

From 6 April 2026, the financial thresholds that determine whether a company is classified as ‘small’ (and therefore exempt from off-payroll rules) will increase. The new limits are: turnover not exceeding £15 million (up from £10.2m), balance sheet total not exceeding £7.5 million (up from £5.1m), and no more than 50 employees (unchanged). Some clients who currently have to make IR35 determinations will drop out of scope, and responsibility for getting the status right will swing back to the contractor’s PSC for those engagements.

If your end client sits near these thresholds, check now whether their status is about to change — it will affect who carries the IR35 risk on your contract.