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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
Off-Payroll Rules
3 Key Status Tests
2026/27 figures
This guide is part of our IR35 Hub, your complete IR35 resource centre. Last reviewed 28 September 2026, on 2026/27 tax rates.
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, 2026/27
The financial difference between being inside and outside IR35 is significant. On a £60,000 annual contract on 2026/27 rates, taking a £12,570 director salary with no expenses or pension contributions, the comparison is:
Outside IR35
£46,091
per year take-home, £3,841 a month
Inside IR35
£41,197
per year take-home, £3,433 a month
That is a difference of £4,895 a year, or £408 a month, which is 10.6% of your outside-IR35 take-home. Put another way, you would need to charge £69,705 inside IR35 to end the year with the same money as £60,000 outside it, an uplift of £9,705. Figures come from our IR35 tax calculator on 2026/27 rates; your own position will move with expenses, pension contributions and your salary/dividend split.
What the April 2026 dividend rise added
The gap narrowed slightly this tax year, but not in contractors’ favour. From 6 April 2026 the dividend ordinary rate rose from 8.75% to 10.75% and the upper rate from 33.75% to 35.75%, while the additional rate stayed at 39.35%. On that same £60,000 contract, the rise costs an outside-IR35 contractor £740 a year. Inside IR35 is unaffected, because only the dividend rates moved, which means the reward for being outside IR35 is smaller in 2026/27 than it was in 2025/26.
The £500 dividend allowance is unchanged, and it is a nil-rate band rather than a deduction: the first £500 of dividends is charged at 0% but still uses up basic rate band. See our dividend tax calculator for the detail, or the limited company tax calculator for the corporation tax side.
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. Our full guide to substitution covers what makes the right genuine rather than cosmetic.
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. Read our detailed guide to mutuality of obligations.
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.
For more information, you can have a look at our IR35 status guides or read HMRC’s guide to determining employment status here.
What is HMRC’s definition of self-employed?
According to the gov.uk website, if someone is self-employed “most of the following are true”:
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’
HMRC states that they will take an overall view of a contractor’s position to determine whether they will be deemed ‘employed’ under the rules, therefore it is extremely important that any contracts should also reflect your working practices.
What IR35 costs at different contract rates in 2026/27
The cost of an inside-IR35 determination does not rise neatly with your rate. Below is the same calculation run at three annual contract values, each on 2026/27 rates with a £12,570 director salary and no expenses or pension contributions.
| Annual contract (ex-VAT) | Outside IR35 take-home | Inside IR35 take-home | Annual difference | As % of outside |
|---|---|---|---|---|
| £60,000 | £46,091 | £41,197 | £4,895 | 10.6% |
| £100,000 | £65,210 | £61,370 | £3,839 | 5.9% |
| £125,000 | £77,016 | £72,110 | £4,906 | 6.4% |
Source: ContractorUK IR35 tax calculator, 2026/27 rates. Assumes an rUK taxpayer, a 12-month accounting period, no company expenses, no pension contributions and a £12,570 director salary. Outside IR35 is modelled as salary plus dividends after corporation tax; inside IR35 as a Chapter 10 deemed payment with employer NIC taken out of the fee first.
Annual take-home on a £60,000 contract, 2026/27 rates
What the figures show:
- The penalty for an inside-IR35 determination is roughly £4,000 to £5,000 a year across these rates, so it is not a fixed percentage and does not simply grow as your rate does
- In proportional terms the hit is heaviest at the lower rate: 10.6% of take-home at £60,000 against 5.9% at £100,000
- On a £60,000 contract outside IR35, you would need to bill about 4.7 fewer weeks to wipe out the advantage over being inside
- The outside-IR35 route on £60,000 leaves roughly the same in your pocket as a £61,265 gross permanent salary, before any employer pension or benefits
- April 2026’s dividend increase narrowed the outside-IR35 advantage by £740 a year on a £60,000 contract
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.
The 2022 repeal that never happened
In the Mini-Budget of September 2022, the UK government announced fundamental changes to IR35, repealing the public sector reforms of April 2017 and the private sector reforms of April 2021. On 17th October 2022 the new chancellor Jeremy Hunt reversed that pledge. Both sets of reforms remain in force today.
April 2026: agencies and clients on the hook for umbrella PAYE
From 6 April 2026, the agency closest to the client (or the client itself, where that agency is connected to it or is not UK resident) became jointly and severally liable for PAYE that an umbrella company fails to account for. This does not change how your IR35 status is decided, but it does change how cautiously the supply chain behaves around inside-IR35 engagements. Our JSL Reform 2026 hub tracks it.
September 2026: Conservatives pledge to replace IR35 outright
On 17 September 2026, shadow chancellor Andrew Griffith went further than any previous front-bench position, telling an audience at a Tottenham technical college: “The next Conservative government will replace IR35, not reform it, not review it, but replace it with a new system that respects the right of the self-employed to choose their status and only prevents actual abuse.” Days earlier, on 11 September 2026, party leader Kemi Badenoch had listed “reforming IR35 rules” among measures to back business. Griffith has appointed Robert Colvile and Craig Mackinlay to design the replacement. Read the reaction from advisers who met Griffith.
Writing for ContractorUK, IPSE’s head of policy and research Josh Toovey set out the three models now on the table: ‘Old IR35’, where only the Intermediaries legislation of 2000 survives; ‘OPW Light’, a stripped-back version of the 2017 and 2021 off-payroll framework; and ‘New IR35’, an entirely fresh test of genuine self-employment.
What this means for you now: nothing has changed in law. This is an opposition pledge, not legislation, and the advisers who have seen the detail are openly sceptical. One called it a ‘slap in the face’ from the architects of the off-payroll rules. Until something is actually enacted, your status still turns on the three tests above and your client still decides it.
You can read a full timeline of how IR35 has changed since it came into force in 2000 here.
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Get IR35 Contract Review →Frequently Asked Questions About IR35
Inside IR35 means HMRC considers you a disguised employee, so you pay tax and National Insurance through PAYE, reducing your take-home pay by around 6% to 11% on typical contract values. 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 £60,000 annual contract on 2026/27 rates, being inside IR35 rather than outside leaves you with £41,197 instead of £46,091, a difference of £4,895 a year, or £408 a month. That is because employer NIC comes out of the fee before PAYE and employee NIC are applied, and no company expenses are deductible from a deemed payment. To net the same money inside IR35 you would need to charge £69,705. The exact difference depends on your expenses, pension and salary/dividend split, so use our IR35 tax calculator for your own numbers.
Not as things stand. On 17 September 2026 shadow chancellor Andrew Griffith pledged that the next Conservative government would “replace IR35, not reform it, not review it”, and appointed Robert Colvile and Craig Mackinlay to design a replacement. But that is an opposition commitment rather than legislation, and advisers who attended the party’s IR35 policy meetings are sceptical it will survive contact with the Treasury. The 2017 and 2021 reforms remain fully in force, so your client still determines your status today.
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.
The 2017 public sector reforms and 2021 private sector reforms shifted responsibility for status determination from contractors to their clients. A promised repeal in the September 2022 Mini-Budget was reversed weeks later and never took effect. Since 6 April 2026, agencies and in some cases clients are jointly and severally liable for PAYE an umbrella company fails to account for. And in September 2026 the Conservatives pledged to replace IR35 outright if elected, though nothing has changed in law.
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Tuesday 4th Jul 2023
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