IR35 explained
IR35 asks one question: strip away the limited company, and would this look like a job? The answer decides how the money is taxed, and since 2021 it is usually not the contractor who gets to decide it.
Updated 11 September 2026 · Tax year 2026/27
The IR35 meaning, in one paragraph #
The IR35 definition is short. If you work through your own limited company for a client, and the relationship would have been employment had the company not been there, the engagement is caught and taxed broadly as employment.
It is now usually called off payroll working. IR35 was the press release number from 1999 and the name stuck, which is why the rules and the nickname do not match, and why what is off payroll working and what is IR35 return the same answer. IR35 off payroll, IR35 tax rules and the off-payroll working rules are all the same body of law.
IR35 inside and IR35 outside #
| Outside IR35 | Inside IR35 | |
|---|---|---|
| What it means | A genuine business-to-business contract | The engagement looks like employment |
| How you are paid | Your company invoices and is paid gross | Tax and NI deducted before you see it |
| How you take it out | Salary and dividends, your choice | Already taxed as employment income |
| Employment rights | None | Still none, which is the sore point |
An IR35 outside result is what most contractors are working towards, and an IR35 assessment is how a client gets to one. Inside IR35 meaning, in one line: the engagement is taxed as employment. Outside IR35 meaning: it is taxed as a business-to-business contract. What is inside IR35 and what is outside IR35 are therefore the same question asked twice, and what does inside IR35 mean in practice is simply the left-hand column above.
Being inside of IR35 is not a judgement about the quality of your work. It is a statement about the shape of the relationship, so an inside IR35 contract and an outside one can be for identical work. What is IR35 in UK law, and what is IR35 legislation more formally, is the same body of rules described above.
That last row is the part contractors object to most, and it is worth being straight about: being inside IR35 for tax does not make you an employee for employment law. You can be taxed like an employee without holiday pay, sick pay or redundancy rights.
Who decides: the client's size, not yours #
This is the IR35 reform of April 2021 and the thing most people get wrong. Your own company's size is irrelevant. What matters is the client's.
| Client | Who determines status |
|---|---|
| Public sector, any size | The client |
| Medium or large private sector | The client |
| Small private sector | Your own company |
A client is small unless it meets two or more of these:
- Turnover over £10,200,000.00
- Balance sheet total over £5,100,000.00
- More than 50 employees
The rules applied to the public sector from April 2017 and to medium and large private sector clients from April 2021. Working for small clients, the original rules still apply and the responsibility is yours.
The Status Determination Statement #
IR35 status determination is the formal name for this step. Where the client determines status, it must issue an SDS. An IR35 determination is not a private view the client keeps to itself: it is a written statement giving its conclusion and the reasons for it, passed to you and to whoever the client contracts with.
You can dispute an SDS. The client has to consider the challenge and respond, either confirming the original decision with reasons or issuing a new one.
The three IR35 tests #
There is no single question that settles it. HMRC looks at the whole relationship, but three factors do most of the work.
| Test | The question | Points outside | Points inside |
|---|---|---|---|
| Control | Does the client decide what you do, how, when and where? | You decide how the work is done and largely when | You are told what to do day to day, like an employee |
| Substitution | Could you send a suitably qualified substitute in your place? | A genuine, unfettered right to send someone else, and you pay them | The client would refuse, or must approve the person first |
| Mutuality of obligation | Must the client offer work, and must you accept it? | No obligation either way once the contract ends | A rolling expectation of continuing work |
Beyond those: do you take financial risk, provide your own equipment, work for other clients, correct defects at your own cost? Are you part and parcel of the organisation, with a pass, a desk and a place on the team chart? The written contract matters, but what actually happens day to day matters more, and a contract that does not match reality is worth very little.
Umbrella companies, sole traders and limited companies #
Three arrangements get compared constantly, and only one of them is actually inside the rules.
| How you work | Does IR35 apply? |
|---|---|
| Through your own limited company | Yes. IR35 limited company engagements are exactly what the rules were written for |
| Through an umbrella company | No. You are already an employee of the umbrella and taxed through PAYE |
| As a sole trader, no company | No off-payroll rules, but employment status still matters to whoever pays you |
An IR35 umbrella company arrangement, or umbrella company IR35 as it is often searched, sits outside the regime because there is no intermediary to look through. That is why an umbrella company outside IR35, or outside IR35 umbrella company, is a slightly confused phrase: the umbrella does not make a contract outside IR35, it makes the question moot by employing you.
Does IR35 apply to self employed people? Not the off-payroll rules, because an IR35 sole trader has no company for HMRC to look through. Employment status still applies though, and the person paying you carries the risk if the relationship is really employment. Employment status meaning, in this context, is the same three tests set out above.
What each route is actually worth is on the inside vs outside IR35 calculator, which compares all three from a day rate.
The IR35 check, and HMRC's tool #
HMRC provides a free IR35 tool called CEST, Check Employment Status for Tax. The IR35 CEST tool, or IR35 HMRC tool as it is also searched, is a questionnaire that produces a determination, and HMRC says it will stand behind the result provided the answers were accurate and the working practices match. It is the IR35 assessment tool most clients use.
There is no official set of IR35 assessment questions and answers to learn, and that is the point: CEST asks about your actual working practices, so the honest answer is the only useful one. What is IR35 status, in the end, is whatever those practices show.
Two honest caveats. It returns "unable to determine" on a meaningful share of cases, which helps nobody. And it has been criticised for how it weighs mutuality of obligation. It is a reasonable first IR35 check and a poor last word on a borderline engagement.
For anything genuinely marginal, or where the sums are large, a paid IR35 review or contract assessment from someone who does this professionally is the sensible step. That is IR35 advice, and this page is not it.
Does IR35 apply in construction? #
It can, and the interaction with CIS confuses people. They are separate schemes testing different things.
CIS applies to construction payments between businesses and deducts tax on account from the labour element. IR35 asks whether a personal-service company engagement is really employment. A subcontractor can be within CIS and outside IR35, or caught by both.
Where an engagement is inside IR35, the off-payroll rules take priority and the payment is taxed as employment income rather than going through CIS. Getting that order wrong means deducting twice or not at all.
If you are inside IR35, what are the options? #
- Accept it and continue through your company. The client deducts tax and NI; your company receives the net and passes it on without further tax.
- Work through an umbrella company. Simpler administratively. You are employed by the umbrella and paid through PAYE, and the umbrella's costs come out of the rate first.
- Take a permanent role. Worth pricing honestly: employment brings holiday, sick pay and pension that an inside-IR35 contract does not.
- Change the working practices. Legitimate only if the reality genuinely changes, not the paperwork.
What the decision is worth depends on your own numbers. The inside vs outside IR35 calculator compares take-home on a day rate three ways, including through an umbrella, and the sole trader vs limited company calculator shows how much of the company advantage survives at current rates, and the answer since April 2026 is: less than most people assume.
IR35 exemptions #
There is no list of exempt trades or job titles. The rules apply by relationship, not by sector, so there is no such thing as inherently outside IR35 roles or outside IR35 contracts: two people doing the same job on different terms can land on different sides.
What does take you outside the off-payroll regime entirely is working for a small client, as above, or not working through an intermediary at all. A genuine sole trader with no limited company is outside off-payroll working, though employment status still matters to the person paying them.
IR35 in practice: forms, compliance and keeping up #
There is no IR35 form in the sense of a return you file. The document that matters is the Status Determination Statement, issued by the client, and the CEST output that usually sits behind it. An IR35 contractor working for a small client keeps the decision, and records it themselves rather than on a form.
IR35 compliance, for a client or agency, means determining status with reasonable care, issuing the SDS with reasons, passing it down the chain, and having a process for handling disputes. Blanket determinations across a whole workforce are the classic failure, because they show no reasonable care was taken.
IR35 news is worth following for one specific reason: the rules have been rewritten twice, in 2017 and 2021, and the direction of travel has been to move responsibility away from the contractor and towards the client. IR35 for dummies, put as simply as it can be: if the company were not there, would this look like a job?
Common questions #
What is IR35?
IR35, now usually called the off-payroll working rules, tests whether someone working through their own limited company would have been an employee of the client if the company were not there. If they would, the engagement is taxed broadly as employment.
What does inside IR35 mean?
Inside IR35 means the engagement looks like employment. Income Tax and National Insurance are deducted at source as though you were an employee, and the tax advantage of working through a company largely disappears for that contract.
What does outside IR35 mean?
Outside IR35 means the engagement is genuinely a business-to-business contract. Your company is paid gross and you decide how to take the money out, through salary and dividends in the normal way.
Who decides my IR35 status?
The size of the client decides. A medium or large private sector client makes the determination and issues a Status Determination Statement. Where the client is small, the decision stays with your own company. Public sector clients always determine, whatever their size.
What counts as a small client for IR35?
A client is small unless it meets two or more of: turnover over £10,200,000, balance sheet total over £5,100,000, or more than 50 employees. Meet two of the three and the client is medium or large, and must determine status.
What is a Status Determination Statement?
The written statement in which a client gives its conclusion on your status and the reasons for it. It must be passed to you and to the party the client contracts with. If the client fails to give reasons, the tax and National Insurance become the client's responsibility.
What are the main IR35 tests?
Control, substitution and mutuality of obligation. Who directs how the work is done, whether you could genuinely send a substitute, and whether there is an ongoing obligation to offer and accept work. No single answer decides it: HMRC looks at the whole picture.