If you work as a contractor through your own limited company, or you hire people who do, the IR35 rules can have a big effect on how much tax is paid and who is responsible for paying it. They are also among the most misunderstood parts of UK tax. Some people assume a good contract is enough. Others think they only matter to large corporations. Neither is quite true.
This guide explains how the rules work in plain English, who makes the decision, what changed in April 2026 and what you can do to stay on the right side of HMRC. It is general information, not tax advice, so speak to a qualified accountant if you have a real contract to assess.
What Are the IR35 Rules?
IR35 is the common name for the “off-payroll working” rules. They exist to catch arrangements where someone works like an employee but is paid through their own company, which can reduce the tax and National Insurance bill compared with being on a payroll.
The question the rules ask is simple. If the contractor’s limited company (known as a personal service company, or PSC) did not exist, would the worker be an employee of the client for tax purposes? If the answer is yes, the work is inside IR35 and the contractor should be taxed broadly as an employee. If the answer is no, it is outside IR35 and the usual company tax treatment applies.
The rules only apply to people working through an intermediary such as a PSC. A person engaged directly as an employee, or a genuine sole trader, is outside their scope.
Who Decides Whether You Are Inside or Outside IR35?
Of all the IR35 rules, this is the part that has changed the most in recent years, and it depends on who the client is.
- Public sector clients: The client has decided status since April 2017.
- Medium and large private sector clients: The client has decided status since April 2021.
- Small private sector clients: The contractor’s own company decides and is responsible for any tax due.
- Clients based wholly outside the UK: Generally outside the client-led rules, though the contractor still needs to consider the position.
What counts as a small client?
A private company is treated as small if it meets at least two of three tests. Following changes that took effect for IR35 from 6 April 2026, those tests are:
| Test | Small company limit |
|---|---|
| Annual turnover | Not more than £15 million |
| Balance sheet total | Not more than £7.5 million |
| Average employees | 50 or fewer |
The turnover limit was previously £10.2 million and the balance sheet limit £5.1 million. Estimates suggest around 14,000 businesses that were previously medium-sized are now classed as small. For contractors, that means more engagements where you must work out your own status. Size is judged using the client’s previous financial year, and companies that sit inside a group may need to be tested as a whole, so ask the client to confirm their position in writing.
How Employment Status Is Assessed
Whether you are inside or outside the IR35 rules comes down to the real working relationship, not the label on the contract. Three questions come up again and again:
- Control: Does the client decide how, when and where the work is done, or do you decide?
- Substitution: Can you send someone else to do the work in your place, and does the client genuinely accept that?
- Mutual obligation: Is the client obliged to offer you work, and are you obliged to accept it?
Other factors also count, such as whether you provide your own equipment, carry financial risk and work for several clients or just one. HMRC offers a free online tool called CEST (Check Employment Status for Tax) to help. HMRC says it will stand by the result if the information entered is accurate and the tool is used in line with its guidance, which makes it a useful starting point, although not every case produces a clear answer.
What Clients Must Do
If you are a medium or large client, or in the public sector, you carry the legal responsibility for status decisions. In practice that means:
- Working out whether your own organisation is small, medium or large.
- Assessing each engagement individually, since blanket decisions for whole groups of workers are not enough.
- Giving the contractor and the party paying them a status determination statement (SDS), which sets out the decision and the reasons for it.
- Responding to any disagreement from the contractor within 45 days.
- Making sure the fee-payer deducts tax and National Insurance if the engagement is inside IR35.
Clients that fail to take reasonable care, or do not pass on a proper SDS, can find the liability for unpaid tax falling on them. That is why many larger firms are cautious and sometimes take a hard line on which contracts they treat as inside.
What Contractors Need to Do
When the client has made a decision, you should check it carefully rather than simply accept it. Read the SDS and make sure the reasons match the way you actually work. If you disagree, put your objection in writing and ask the client to reconsider using the 45-day process.
When the client is small, the job falls to you. You need to assess each contract, keep evidence of your decision and, if the work is inside IR35, account for the tax through your company by making what is known as a deemed employment payment. Your company’s own tax affairs still matter too, and our guide to what corporation tax is and how it works covers the company side.
Inside vs Outside IR35: What Changes?
The practical difference under the IR35 rules is significant. Inside IR35, your fees are treated much like salary. Income tax and employee National Insurance are deducted, and employer National Insurance is also due. The scope for deducting business expenses is more limited, so take-home pay is usually lower than for a similar contract outside the rules.
Outside IR35, you can run the work through your company in the normal way. Many contractors pay themselves a modest salary and take the rest as dividends, and ordinary business expenses can generally be claimed. Because the financial gap can be large, the status decision often becomes a point of negotiation between clients, agencies and contractors.
Practical Tips to Stay Compliant
A few habits make the IR35 rules far easier to live with, whether you are the contractor or the client.
- Use a written contract that reflects reality. Clauses about substitution or control mean little if the day-to-day work contradicts them.
- Keep evidence. Save contracts, statements of work, CEST results, emails and any SDS you receive.
- Check every new engagement. Status can change from one contract to the next, even with the same client.
- Ask for reasons. If you are told a role is inside IR35, request a clear explanation and challenge it if it looks wrong.
- Review umbrella company arrangements. New rules for labour supply chains that involve umbrella companies also started on 6 April 2026, so both sides should check who is responsible for what.
- Take advice early. A short review from a specialist adviser costs far less than an HMRC enquiry.
Common Mistakes
Some errors appear again and again around the IR35 rules. Contractors sometimes assume a client’s label is final when it can be challenged. Clients occasionally apply the same decision to every contractor without looking at each role. Both sides also forget that the working practices matter more than the wording. Finally, people miss the size threshold changes and keep following old assumptions about who is responsible.
Frequently Asked Questions
Do the IR35 rules apply to sole traders?
No. They are aimed at workers who supply their services through an intermediary such as a limited company. A genuine sole trader contracting directly is dealt with under general employment status rules.
Can a contractor challenge an inside IR35 decision?
Yes. Where the client has made the decision, you can disagree in writing, and the client must respond within 45 days with its reasons.
What is a status determination statement?
It is a written statement from the client that gives its conclusion on whether the engagement is inside or outside IR35, together with the reasons.
Do the IR35 rules affect people employed by an umbrella company?
Not in the same way. The off-payroll rules apply to workers supplying services through their own company. Someone employed directly by an umbrella company is outside them, although the new umbrella company rules may be relevant.
Is a contractor automatically inside IR35 if they work for one client?
Not automatically. Working for a single client is one factor, but the overall picture, including control, substitution and obligations, is what counts.
Do I still need to understand IR35 if my client is small?
Yes. Responsibility sits with your own company, so you must decide your status and keep evidence to back it up.
Final Thoughts
The IR35 rules are about substance, not paperwork. Who has control, whether a substitute is genuinely allowed and whether there is an ongoing obligation to provide and accept work all matter far more than a neat clause in a contract. With the small company thresholds now higher, more contractors will need to make their own assessment, and more clients will no longer carry that burden. Whichever side of the table you sit on, assess each engagement properly, keep good records and get specialist advice for anything borderline.
