You can have a limited company, send invoices to clients and manage your own work, yet still be treated as an employee for tax purposes. This is where IR35 becomes important: it is the UK tax rule that decides whether a contractor working through their own limited company should be taxed as an employee or as self-employed, based on how a specific contract actually operates, not on job title or company structure. For many IR35 contractors, the difficult part is understanding whether the rules apply to a particular contract and what happens to their tax when they do.
The off-payroll working rules, commonly called IR35. It deals with situations where someone works through an intermediary, usually their own limited company, but would have been an employee if they had provided their services directly to the client. HMRC says the rules apply on a contract-by-contract basis, so one contract can be inside IR35 while another can be outside.
In simple terms, IR35 determines whether a contractor should be treated as employed or self-employed for tax purposes. If a contract is inside IR35, income from that engagement generally receives employment style tax treatment. If it is outside IR35, the contractor’s intermediary normally deals with the income under the usual company and personal tax rules.
In this guide, you will learn what IR35 means, how your status is assessed, who makes the decision and what being inside IR35 can mean for your Self Assessment and Corporation Tax, including a worked example of what it does to your take-home pay.
What Is IR35?
IR35 is the common name for the off payroll working rules. They are designed to prevent situations where a worker would effectively be an employee if they worked directly for a client, but provides their services through an intermediary and receives different tax treatment as a result.
For IR35 contractors, having a limited company does not automatically mean that a contract is outside IR35. HMRC considers the actual working relationship, including the contract and how the work is carried out. Factors such as control, personal service and the right to provide a substitute can all be relevant.
The rules do not apply simply because someone calls themselves a contractor. The key question is whether the particular engagement would be treated as employment if the services were provided directly to the client.
IR35 was introduced in 2000 and has been amended twice since: in April 2017, when responsibility for public sector determinations moved to the client, and in April 2021, when the same change was extended to medium and large private sector clients. Contractors who have worked through their own limited company since before 2021 may still be more familiar with the earlier rules, where the contractor’s own intermediary made the determination in every case.
Inside vs Outside IR35: What’s the Difference
For IR35 contractors, the difference between inside and outside IR35 can affect how tax is handled. An inside IR35 engagement is treated as employment for tax purposes, while an outside IR35 engagement is treated as self employment for that particular contract.
| Feature | Inside IR35 | Outside IR35 |
| Tax status | Treated as employed for tax purposes | Treated as self employed for tax purposes |
| Income Tax | Employment style tax treatment | Normal company and personal tax rules |
| National Insurance | Employee and employer NIC can apply | Normal company arrangements |
| Limited company | Can generally continue operating | Continues to receive and manage contract income |
| Tax deduction | Usually handled by the fee payer where applicable | Normally no PAYE deduction by the fee payer |
| Status | Deemed employment | Deemed self employment |
To put this in real terms: a contractor billing £500 a day who is found inside IR35 for a contract will typically see the fee payer deduct Income Tax and employee National Insurance before payment reaches their limited company, in the same way a salary would be taxed. The same contractor on an outside IR35 contract receives the full £500 day rate into the company and manages Income Tax, National Insurance and dividend tax through the usual Corporation Tax and personal tax process, which generally leaves more scope for tax planning but also more responsibility for getting it right.
Being inside IR35 does not mean you must close your limited company. You can continue using it, although the way tax and National Insurance are handled for that engagement can change.
Remember that IR35 is assessed contract by contract. One engagement being inside IR35 does not automatically make another engagement inside IR35.
The Three Tests That Decide Your Status
There is no single question that decides whether an engagement is inside or outside IR35. HMRC considers the written contract alongside the actual working arrangements and wider employment status principles.
For IR35 contractors, three important areas are personal service, control and mutuality of obligation. Other factors, including financial risk, the opportunity to make a profit and integration into the client’s organisation, can also affect the final decision.
Personal Service and Substitution
If you are personally required to complete the work and cannot send someone suitably qualified in your place, this can point towards employment. A genuine right of substitution can support self-employed status, but simply having a substitution clause does not automatically make a contract outside IR35.
Control
Consider who decides how, when and where the work is carried out. Greater control over how you deliver the service may support an outside IR35 position, while close supervision by the client can point towards employment.
Mutuality of Obligation
This considers whether the client is expected to provide work and whether you are expected to accept it. It is only one part of the overall assessment and should not be considered on its own.
For IR35 contractors, looking at the complete working relationship is important. HMRC’s Check Employment Status for Tax tool can also help assess an engagement, and can be accessed directly at gov.uk’s CEST tool.
Sole Trader, Limited Company, or Umbrella: Does IR35 Even Apply to You?
Not every contractor deals with IR35 in the same way. The rules mainly concern people who provide services through an intermediary, such as their own limited company or personal service company. A sole trader who contracts directly with a client is generally outside the off payroll working rules because there is no intermediary. If you are still weighing up which structure suits you, our guide to sole trader vs limited company covers that decision in more detail.
Sole Trader
If you work directly as a sole trader, IR35 generally does not apply. Your income is normally reported through Self Assessment, with tax based on your taxable profits.
Limited Company
If you provide services through your own limited company, IR35 may apply. The engagement needs to be assessed to determine whether you would have been an employee if you had contracted directly with the client. This arrangement is common among IT contractors, who make up a large share of the UK contracting workforce and who often move between limited company and umbrella set-ups depending on the client and contract length.
Umbrella Company
If you are employed by an umbrella company, the off payroll working rules are unlikely to apply to you. Your employment taxes are normally dealt with through PAYE by your employer.
What Determines IR35 Status?
Your IR35 contractor status depends on the actual circumstances of the engagement. HMRC considers the contract and working practices rather than relying only on your job title or the fact that you operate through a limited company.
Not Sure Where You Stand?
Do not assume that being paid through a limited company automatically makes you outside IR35. Review your contract, working arrangements and relationship with the client before deciding how the income should be treated.
Professional advice can be useful where the contract is complex or the financial consequences of getting the status wrong could be significant.
Who Decides Your Status and the Small Business Exemption
Responsibility for the IR35 decision depends on the sector, the size of the organisation hiring you, and how the engagement is structured. In the public sector, and where a private business is medium or large, the end client makes the call on whether the off-payroll rules apply. If a private sector company qualifies as small, the responsibility usually sits with the contractor’s intermediary.
The Client Usually Decides
Where the client is responsible, it should make a status determination and provide a Status Determination Statement, or SDS. The statement should say whether the engagement is inside or outside the rules and explain the reasons for the decision.
The Small Business Exemption
If a private sector client qualifies as a small client, it generally does not have to make the IR35 determination. Instead, the contractor’s intermediary is responsible for deciding whether the rules apply.
The size test is not simply based on the number of employees. Specific financial and employee thresholds apply, so the client’s status should be checked against the relevant rules.
If you disagree with a client’s decision, you can raise your concerns through its status disagreement process. The client must consider the reasons provided and respond accordingly.
Small Client Thresholds and Timing (2026/27)
A client is “small” for IR35 if it meets at least two of the following Companies Act tests:
- Annual turnover ≤ £15 million
- Balance sheet total ≤ £7.5 million
- Average employees ≤ 50
These thresholds increased for financial years beginning on or after 6 April 2025. Because IR35 client size is judged using prior financial years, the earliest practical effect on off‑payroll status is typically 6 April 2027, though some clients may reclassify from 6 April 2026 depending on their year‑end. Always confirm the client’s size for the relevant tax year.
You can formally request written confirmation of the client’s size; they generally have 45 days to respond. For group structures, size is assessed on the group as a whole.
What Being Inside IR35 Means for Your Self Assessment and Corporation Tax Return
Being a contractor inside IR35 can change how income from that engagement is taxed. Where the client is responsible for the rules, the fee payer generally deducts Income Tax and employee National Insurance before paying the contractor’s intermediary. Employer National Insurance may also apply.
Being inside IR35 does not mean your limited company automatically stops existing or that all company income receives the same treatment.
Your Self Assessment
You may still need to submit a Self Assessment tax return when an engagement is inside IR35. Your return may include other income and tax information, while tax already accounted for under the off-payroll rules is taken into consideration.
Your Limited Company’s Tax Position
Your limited company can still have Corporation Tax and filing responsibilities. Specific rules help prevent the same income being taxed twice where amounts have already been subject to the off payroll working rules.
PAYE and National Insurance
Where the client is responsible for IR35, the fee payer generally deducts Income Tax and employee National Insurance. Employer National Insurance is also normally dealt with by the fee payer.
Dividends From Your Company
Being inside IR35 does not automatically turn every dividend you have received into employment income. HMRC has rules dealing with amounts already subject to the off-payroll rules, but the treatment depends on the circumstances.
Your Other Contracts
IR35 applies on a contract-by-contract basis. You can have one engagement inside IR35 and another outside it, so the result of one contract should not automatically be applied to all company income.
What Happens If HMRC Opens an Enquiry?
An HMRC enquiry can be concerning, particularly if it relates to several years of work through your limited company. HMRC may ask why you considered an engagement outside IR35 and request documents that support your position.
During an enquiry, HMRC may:
- Ask for copies of contracts and agreements.
- Review invoices and payment records.
- Ask how the work was actually carried out.
- Examine your working relationship with the client.
- Ask about control, substitution and other employment status factors.
- Ask why you believe the engagement was outside IR35.
- Calculate additional tax and National Insurance if it concludes that the rules apply.
The normal HMRC assessment time limit is generally four years from the end of the relevant tax period. This can increase to six years where tax was lost because of careless behaviour and, in certain circumstances, up to 20 years where the loss was brought about deliberately.
If HMRC contacts you, do not ignore the enquiry. Gather your contracts, invoices, correspondence and evidence of your working arrangements so you can respond properly.
It is also worth checking whether you already have IR35 investigation insurance. Many contractor accounting packages include it, and it can cover the professional fees involved in responding to an enquiry.
FAQs: Frequently Asked Questions
Does IR35 apply if I’m a sole trader, not a limited company?
IR35 generally applies where services are provided through an intermediary. A genuine sole trader contracting directly with a client is normally outside the off payroll working rules, although their employment status can still be considered under ordinary employment status rules.
Can I still work through my limited company if I’m found inside IR35?
Yes. Being inside IR35 does not automatically prevent you from working through your limited company. The main change is how income from that engagement is taxed and reported.
What’s the small business exemption, and how do I know if my client qualifies?
A qualifying small private sector client generally does not have to make the IR35 determination. Specific financial and employee tests apply, so the client’s size needs to be checked against the relevant rules.
How far back can HMRC investigate my IR35 status?
The normal assessment time limit is generally four years, but this can increase to six years for careless behaviour and up to 20 years in certain cases involving deliberate behaviour or failure to notify. The exact limit depends on the circumstances.
What happens to money I’ve already taken as dividends if I’m later found inside IR35?
Being found inside IR35 does not automatically turn every previous dividend into employment income. HMRC has rules to prevent double taxation where amounts have already been subject to the off-payroll rules.
Can I dispute my client’s IR35 status decision?
Yes. If your client is responsible for the decision and you disagree, you can use its status disagreement process to explain why you believe the decision is incorrect. The client must consider your reasons and respond through the required process.
Does IR35 affect umbrella company contractors?
The off payroll working rules are unlikely to apply where you are employed by an umbrella company. Your employment taxes are normally dealt with through PAYE instead.
Conclusion
IR35 can have a significant effect on contractors who provide services through their own limited company, but not every contractor is automatically inside IR35. Your status depends on the individual engagement, the contract and the way you actually work. One contract can also have a different IR35 outcome from another.
For IR35 contractors, understanding your position before accepting a contract can help you avoid unexpected tax problems. If you are inside IR35, you need to understand how the engagement affects PAYE, National Insurance, Self Assessment and your limited company’s accounts. If you believe you are outside IR35, keeping good records and evidence of your working arrangements is important.
MyIVA helps contractors and small firms with the accounting and tax work that comes with operating a limited company. From Self Assessment, Corporation Tax filing to Bookkeeping and general tax support, MyIVA can help you understand what needs to be reported and keep your financial records in order, including a review of your contract and working arrangements through MyIVA’s contractor accounting service.
Not sure about your IR35 position or how it affects your tax return? Speak to MyIVA today for practical accounting and tax support tailored to your circumstances.
