What is IR35?
IR35, the off-payroll working rules, makes contractors working through their own company pay employment-level tax when the engagement would be employment if they were hired directly.
What IR35 means
IR35 targets "disguised employment". A contractor who supplies their services through a personal service company could otherwise take a small salary and the rest in dividends, paying far less tax and National Insurance than an employee doing the same job. If the working relationship looks like employment, the rules treat the income as employment income.
The tests come from employment law, and no single one decides it:
- Control: does the client decide how, when and where you work?
- Substitution: could you genuinely send someone else to do the work?
- Mutuality of obligation: must the client offer work and must you accept it?
- Other signs: financial risk, your own equipment, being part and parcel of the organisation
Who decides
For medium and large clients, the client decides your status and must give you a Status Determination Statement. If they decide you are inside IR35, the fee-payer (the agency or client) deducts PAYE and NI before paying your company. For small clients, your own company decides and accounts for any tax. A small client is broadly one meeting two of: turnover up to £15 million, balance sheet up to £7.5 million, or up to 50 employees (the higher thresholds apply from April 2025 accounts).
Example
A software contractor earns £120,000 a year at £550 a day. Outside IR35, with no other costs, a £12,570 salary and the rest as dividends leaves around £74,500 after Corporation Tax and personal tax. Inside IR35 the fee is treated as salary: after employer NI the deemed salary is about £105,000, and take-home falls to roughly £70,500. The gap is smaller than it used to be, but inside IR35 also loses the option of keeping profit in the company. Run your own figures with our calculators.
Why it matters
Getting status wrong can mean years of back tax, interest and penalties. Contractors should keep the contract, the status statement and evidence of how they actually work, because HMRC looks at reality as well as paperwork. Inside-IR35 work can still be done through a limited company, but the tax saving largely disappears, so many contractors compare it with an umbrella company.
Keeping evidence
Keep a file for each engagement: the contract and any changes, the status determination, emails showing you decided how to do the work, examples of using your own equipment, and any time you sent a substitute or turned down work. HMRC enquiries can look back several years, and contemporaneous evidence carries far more weight than a statement written later.
Cloudkeepers reviews contracts for contractors and models inside and outside take-home before you sign.
Common questions
No. IR35 applies to workers providing services through an intermediary, usually their own limited company. Sole traders are judged on whether they are genuinely self-employed under the normal employment status rules, which use similar tests.
Yes. Medium and large clients must have a process to respond to disagreements within 45 days. You can provide evidence about substitution, control and how the work is done. If they keep the decision, you can renegotiate or decline the role.