What IR35 is
IR35, also called the off-payroll working rules, applies when you provide your services through an intermediary, usually your own limited company, to a client. If you would be an employee of the client were it not for your company, the contract is inside IR35 and you must be taxed broadly like an employee. If you are genuinely in business on your own account, it is outside IR35.
The rules exist because paying yourself through a company (a small salary plus dividends) usually costs less in tax and National Insurance than a salary of the same value, and avoids employer NI altogether.
Who decides your status
- Who decides
- The client
- You receive
- A Status Determination Statement
- Who pays PAYE if inside
- The fee-payer (client or agency)
- Who decides
- Your own company
- You receive
- Nothing from the client
- Who pays PAYE if inside
- Your company (a deemed payment)
A client is small if it meets at least two of these: turnover of £15 million or less, a balance sheet of £7.5 million or less, and 50 or fewer employees. Since April 2021 all public sector clients decide status, whatever their size.
What decides your status
Status depends on the reality of the working relationship, not just the contract. The main factors are:
- Control: does the client decide how, when and where you work, or only what you deliver?
- Substitution: can you send someone else to do the work, and would the client have to accept them?
- Mutuality of obligation: must the client offer work and must you accept it?
- Financial risk and being in business: do you bear costs, fix mistakes at your own expense, have several clients, and market your services?
- Part and parcel: are you treated like staff, with line management, staff benefits or an email signature showing the client’s name?
HMRC’s Check Employment Status for Tax (CEST) tool gives a view based on your answers. HMRC stands by its result if the information you give is accurate.
Inside IR35: how you are paid
Most contractors inside IR35 use an umbrella company, which employs them, invoices the agency and pays them through PAYE. The umbrella takes its fee, then pays employer National Insurance (15% above £5,000) and the 0.5% Apprenticeship Levy out of the contract income, before paying you a salary.
- Contract income£110,000
- Umbrella fee£25 × 52−£1,300
- Employer NI and Apprenticeship Levy−£13,938
- Your gross salary£94,762
- Income Tax−£25,337
- National Insurance−£3,906
Watch out for umbrella schemes
Some umbrella companies promise unusually high take-home through loans or bonuses that avoid tax. HMRC treats these as tax avoidance and you remain liable. From April 2026, recruitment agencies became responsible for making sure umbrella companies they use account for PAYE correctly.
Outside IR35: how you are paid
Outside IR35 your company invoices the client and pays its costs. A common approach is a salary of £12,570, which uses your tax-free allowance, with the remaining profit paid as dividends after Corporation Tax.
- Company income£110,000
- Costs, salary and employer NI£2,000 + £12,570 + £1,135.50−£15,706
- Corporation Tax19% to £50,000, then 26.5% marginal−£21,238
- Dividends paid£73,056
- Dividend tax10.75% then 35.75%−£16,639
A sole-director company cannot claim the Employment Allowance, so employer NI is due on salary above £5,000. Some directors take a salary of £5,000 instead, which avoids employer NI but uses less of their tax-free allowance. A salary below £6,708 also means the year does not count towards your State Pension.
Inside and outside compared
| Day rate | Contract income | Inside IR35 | Outside IR35 | Difference |
|---|---|---|---|---|
| £300 | £66,000 | £43,424 | £48,209 | £4,785 |
| £400 | £88,000 | £54,472 | £58,598 | £4,127 |
| £500 | £110,000 | £65,519 | £68,988 | £3,468 |
| £700 | £154,000 | £82,201 | £87,520 | £5,319 |
The gap is smaller than many people expect, because Corporation Tax and dividend tax rates have risen in recent years. Outside IR35 also means paying your own accountant, insurance and other costs, and getting no holiday pay, sick pay or pension contributions from an employer.
Setting a day rate
A day rate needs to cover more than a salary does. When comparing an inside IR35 role with a permanent job, remember that:
- Employer NI and the Apprenticeship Levy come out of your rate inside IR35, not the client’s budget.
- You are only paid for days you work: holidays, bank holidays, sickness and gaps between contracts are unpaid.
- There is no employer pension contribution, which is often worth 3% to 10% of salary in a permanent job.
Rules of thumb for converting day rates to salaries are unreliable, because tax bands, employer costs and the number of days you actually bill all change the answer. Use the calculator’s equivalent salary figure, which finds the permanent salary with the same take-home as your outside IR35 income.
Challenging a determination
- Step 1Read the Status Determination Statement
It must give the client’s conclusion and the reasons for it.
- Step 2Raise a disagreement
Write to the client explaining why you disagree, with evidence about how you actually work.
- Step 3Client responds within 45 days
They must either confirm the determination with reasons or change it.
If a contract is inside IR35, you can still claim some expenses through the umbrella, but not the full range available to a business. You keep the right to challenge future contracts on their own facts.
A short history of IR35
- April 2000IR35 introduced
Contractors’ own companies had to decide their status and pay any tax due.
- April 2017Public sector reform
Public sector clients became responsible for deciding status.
- April 2021Private sector reform
Medium and large private clients took over the decision too.
- April 2024Offset for tax already paid
When a client gets status wrong, tax the worker already paid can be set against what HMRC claims.
Take-home per day billed
| Day rate | Inside IR35 | Outside IR35 |
|---|---|---|
| £250 | £170.28 | £186.50 |
| £350 | £222.49 | £242.74 |
| £600 | £335.48 | £359.78 |
| £800 | £419.53 | £439.49 |
Outside IR35 figures assume £2,000 of costs and a £12,570 salary; inside figures assume a £25 a week umbrella fee. Your accountant’s fees, insurance and other costs reduce the outside figures further.
Pensions for contractors
Outside IR35, your company can pay into your pension as an employer contribution. It is a business cost, so it reduces Corporation Tax, and there is no National Insurance or dividend tax on it. For many contractors this is the most tax-efficient way to extract profit.
Inside IR35, salary sacrifice through your umbrella company gives tax and NI relief at your marginal rate. In both cases, total contributions are normally limited by the £60,000 annual allowance, and outside IR35 the contribution must be justifiable as a business expense.
Expenses inside and outside
- Travel to the client
- Usually not claimable
- Equipment
- Limited
- Accountant
- Not needed
- Travel to temporary sites
- Usually claimable
- Equipment and software
- Claimable
- Accountant and insurance
- Business costs
Signs a contract is inside or outside
- Hours and place
- Set by the client
- Substitution
- Not allowed in practice
- Work
- Ongoing, like staff
- Management
- Line-managed by the client
- Hours and place
- Your choice
- Substitution
- A genuine right
- Work
- A defined project
- Risk
- You fix errors at your cost
No single factor decides status. Tribunals and HMRC look at the whole picture, including what actually happens day to day, not just what the contract says. A contract with a substitution clause that would never be used in practice carries little weight.
Moving from a permanent job to contracting
Contracting can pay more, but compare like with like. A permanent salary usually comes with paid holiday, bank holidays, sick pay, an employer pension contribution, and often other benefits such as life cover. As a contractor you are paid only for the days you bill, and gaps between contracts can be long.
Before switching, work out how many days you can realistically bill in a year, add up the costs of running a company or using an umbrella, and keep a cash buffer of at least three to six months of spending. Use the equivalent salary figure in the calculator to compare an offer with your current job.
Reading an umbrella payslip
An umbrella payslip has two parts. The first shows the assignment income: the money the agency paid the umbrella for your work. The second shows your employment: your gross pay and the normal deductions.
- Assignment income20 × £500£10,000.00
- Umbrella fee−£100.00
- Employer NI and Apprenticeship Levy−£1,274.46
- Gross pay to you£8,625.54
Check that the assignment income matches your timesheets and that the gross pay is clearly shown. If a payslip shows large non-taxable “expenses”, “loans” or “bonuses” that make your take-home look unusually high, it may be a tax avoidance scheme, and HMRC can ask you to pay the tax.