Compare your estimated annual take-home pay inside IR35 versus outside IR35 to understand the financial impact on your contracting income.
IR35 — formally known as the off-payroll working rules — is UK legislation that was introduced in April 2000 (the name comes from the Inland Revenue press release number 35 of 1999). Its purpose is to counter what HMRC calls "disguised employment": where an individual provides services through a limited company intermediary but would, in reality, be an employee if the company did not exist.
From HMRC's perspective, a contractor operating outside IR35 can be significantly more tax-efficient than an employee earning the same income. A contractor can extract income as a combination of salary and dividends, keeping National Insurance contributions low. IR35 is designed to close this gap where the working relationship is functionally identical to employment.
Being caught inside IR35 has significant financial consequences. You remain responsible for the additional income tax and NI as though you were an employee — but without employment benefits like sick pay, holiday pay, pension contributions, or job security. The financial penalty of being caught inside IR35 can amount to £5,000 to £15,000 per year in additional taxes for a typical IT or professional services contractor.
IR35 introduced by the then-Inland Revenue. Contractors' own limited companies responsible for self-assessment and status determination.
Off-payroll working reforms applied to the public sector. Public sector bodies become responsible for IR35 status determinations, shifting liability from contractors to clients.
Private sector reform originally planned. Delayed by one year due to COVID-19 pandemic.
Off-payroll working reforms extended to medium and large private sector companies. End clients responsible for IR35 determinations. Small companies remain exempt.
HMRC error correction: off-payroll rules amended so contractors are no longer double-taxed when client has already deducted employment taxes.
Current framework in place. HMRC CEST tool updated. Ongoing enforcement action against non-compliant arrangements.
| Factor | Outside IR35 | Inside IR35 |
|---|---|---|
| Tax treatment | Company profits, salary + dividends | Deemed employment payment |
| Income tax | On salary + dividends (efficient) | Full PAYE on all income |
| National Insurance | Employer 13.8% on salary only | Employee 8%/2% + Employer 13.8% |
| Corporation tax | 19-25% on company profits | Minimal (less profit left in company) |
| Expenses | Can offset against company profit | Deductible before deemed payment |
| Pension | Employer contributions from company | Can still contribute via umbrella |
| Employment benefits | None (no holiday/sick pay) | None (despite employee-level tax) |
| Annual take-home on £100k gross | ~£65,000–£68,000 | ~£56,000–£59,000 |
Employment status for IR35 purposes is assessed holistically by looking at the entire working arrangement. However, three key tests carry the most weight in case law and HMRC guidance:
What it means: Do you have an unfettered right to send a substitute to carry out the work in your place, without the client's approval of that specific individual?
Outside IR35 indicators:
Inside IR35 indicators:
Outside pointer Strong right to substitute is the single most powerful indicator of outside IR35 status in HMRC cases.
What it means: Does the client control how, when, and where you work — or do you have genuine autonomy over how you deliver the service?
Outside IR35 indicators:
Inside IR35 indicators:
Context dependent Control is assessed across all three dimensions: what work, how it is done, and when/where.
What it means: Is the client obliged to offer you work, and are you obliged to accept it? In genuine employment, both obligations exist. In genuine contracting, neither should.
Outside IR35 indicators:
Inside IR35 indicators:
HMRC scrutiny Long-term single-client engagements face particular scrutiny on MOO grounds.
Beyond the three main tests, HMRC and tribunals also consider:
The 2021 private sector reforms fundamentally changed who is responsible for IR35 status determinations:
If your end client is a medium or large company (meeting two of three criteria: turnover over £10.2m, balance sheet over £5.1m, more than 50 employees), the client must:
If the client fails to issue an SDS, they become the deemed employer and liable for any unpaid taxes.
If the end client is a small company (meeting two of three criteria: turnover under £10.2m, balance sheet under £5.1m, under 50 employees), the old IR35 rules apply: your own company is responsible for determining and declaring whether your engagement is inside or outside IR35. The liability remains with your PSC.
HMRC's CEST (Check Employment Status for Tax) tool is available online at gov.uk and is designed to help contractors, clients, and agencies determine IR35 status. HMRC has committed to stand behind CEST results (provided information is entered accurately and in good faith).
If your engagement is inside IR35, a deemed employment payment calculation applies. The contractor's company receives the gross payment from the client but must treat it as if it were employment income:
The deemed employment payment (DEP) is calculated after deducting:
Income tax and employee NI are then applied to the remaining deemed payment.
An umbrella company acts as an employer for contractors, operating PAYE on all income from the outset. Umbrella companies are commonly used when:
HMRC has issued warnings about mini umbrella companies and disguised remuneration schemes that promise to retain 85-90% of income. These are invariably non-compliant and HMRC actively pursues them. Always use an umbrella that is on the FCSA or Professional Passport accredited list and can demonstrate full PAYE compliance.
If you receive a Status Determination Statement (SDS) that you believe is incorrect, you have the right to challenge it through the client's formal disagreement procedure:
IR35 (off-payroll working rules) is UK legislation designed to ensure contractors who work like employees pay similar levels of income tax and National Insurance as direct employees. If HMRC or a client determines your engagement would be employment if the limited company intermediary did not exist, you are inside IR35 and must pay employment taxes on your income through a deemed employment payment calculation.
The three main IR35 tests are: (1) Substitution — can you send a substitute to do the work without the client choosing that specific individual? A genuine right to substitute is a strong outside IR35 indicator. (2) Control — does the client dictate how, when, and where you work? Genuine autonomy points to outside IR35. (3) Mutuality of Obligation — is the client obliged to offer work and are you obliged to accept it? Defined, time-limited projects with no ongoing obligation point to outside IR35. These tests are assessed holistically alongside other factors.
From April 2021, medium and large private sector companies are responsible for determining IR35 status for contractors they engage. They must issue a Status Determination Statement (SDS) and take reasonable care in their assessment. Small companies (under £10.2m turnover, £5.1m balance sheet, 50 employees — meeting two of three) are exempt: in those cases, the contractor's own limited company determines status under the original IR35 rules that applied before 2021.
Inside IR35, you pay income tax and National Insurance on a deemed employment payment, similar to an employee. For a typical contractor billing £80,000–£100,000 per year, being inside IR35 typically costs between £6,000 and £15,000 per year more in tax compared to operating efficiently outside IR35 (using an optimised salary plus dividend strategy). The exact difference depends on your gross income, expenses, pension contributions, and the specific tax year.
Yes. If you disagree with a Status Determination Statement issued by a client, you can formally dispute it. The client must respond within 45 days with either a revised determination or stated reasons for maintaining the original one. You can take the matter to HMRC, the First-tier Tax Tribunal, or negotiate revised contract terms that more clearly demonstrate outside IR35 status — particularly around genuine substitution rights, reduced supervision and control, and defined project scope without rolling obligations.
An umbrella company acts as your employer, receiving payment from the client and paying you via PAYE after deducting income tax, National Insurance, and its own margin (typically £15–£40 per week). All income is taxed as employment income from the outset, removing IR35 concerns. Umbrella companies are appropriate when a client insists on inside IR35, your contract rate is too low to justify a limited company, or you want simplicity over tax efficiency. Always use an FCSA or Professional Passport accredited umbrella to ensure full compliance.
If HMRC opens an IR35 investigation (now formally called an off-payroll working check), they will review your contracts, working practices, and the actual reality of your day-to-day engagement. They may interview you, your agency, and your client. Investigations can cover up to 6 years of past engagements. If HMRC determines you were inside IR35, they will raise assessments for unpaid income tax, employee NI, and employer NI, plus interest and potentially penalties. IR35 investigation insurance (typically £300–£500/year) covers professional adviser fees during investigations.