Self employed
If you work through your own limited company, IR35 can cut your take home pay sharply. Here is what it means, how status is decided, and how to stay outside it legitimately.
IR35 is one of the most misunderstood and most feared parts of the UK tax system, and for good reason, because being caught by it can cut a contractor's take home pay by a quarter or more. If you work through your own limited company, often called a personal service company, you need to understand it. This guide explains in plain English what IR35 is, how to tell whether you are inside or outside it, and what it means for your pay, with a worked example for the 2026/27 tax year.
IR35, also called the off payroll working rules, is designed to stop what HMRC calls disguised employment. The target is a person who works through their own limited company but who, if you stripped the company away, would really be an employee of the client they work for. HMRC's view is that such a person should pay broadly the same tax and National Insurance as an employee, rather than enjoying the lower tax of running a company. IR35 is the mechanism that makes that happen.
Everything turns on two phrases. If your working arrangement looks like genuine self employment, you are outside IR35, and you can pay yourself in the tax efficient mix of a small salary and dividends. If your arrangement looks like employment in all but name, you are inside IR35, and most of the money the company receives for your work has to be treated as employment income, with Income Tax and National Insurance taken off before you ever see it. The difference in take home pay between the two is large, which is why status matters so much.
The rules exist because, without them, two people doing identical work side by side could pay very different amounts of tax simply because one used a company and the other was on the payroll. Governments have long viewed that as unfair and as a loss of revenue, so IR35 tries to tax people on the reality of their working relationship rather than on the label on the contract.
This is where the rules were reformed, and it is the part contractors most need to understand. For work done for a public sector body, or for a medium or large private sector client, the client decides your IR35 status, not you, and if you are inside, the client or the agency that pays your company must deduct the tax before paying you. Only where your client is a small company does the old position remain, with your own company responsible for deciding your status and accounting for the tax. A company counts as small if it meets at least two of three tests, broadly turnover no more than 10.2 million pounds, a balance sheet total no more than 5.1 million pounds, and no more than 50 employees.
Whether you are inside or outside IR35 comes down to the real working relationship, judged against several tests built up by the courts. The first is personal service and substitution. If you must do the work personally and cannot send a qualified substitute in your place, that points towards employment. The second is control. If the client decides what you do, how you do it, when and where, that points towards employment, whereas a genuine contractor has real freedom over how the job is done. The third is mutuality of obligation, which asks whether the client is obliged to offer you work and you are obliged to accept it. A rolling expectation of continuous work looks like employment, while a series of defined projects looks like a business. No single test decides it. HMRC and the courts look at the overall picture.
Take a contractor whose company invoices 80,000 pounds in a year for their work. If they are outside IR35, they might take a salary of around 12,570 pounds and the rest as dividends, paying corporation tax in the company and then dividend tax personally, and could keep very roughly 60,000 to 63,000 pounds after tax depending on the detail. If exactly the same 80,000 pounds is inside IR35, almost all of it is treated as employment income. After Income Tax, employee National Insurance and the employer National Insurance that comes out of the fee, the take home could fall to somewhere around 52,000 to 55,000 pounds. The same work and the same fee can therefore leave the contractor several thousand pounds worse off simply because of status, which is why a correct determination is so important.
You cannot choose to be outside IR35 just by writing it into a contract. What matters is the reality of how you work. Genuine indicators of being in business on your own account help, such as having the right to send a substitute and meaning it, taking real financial risk, working for several clients, providing your own equipment, correcting unsatisfactory work in your own time, and not being treated like a member of staff with a desk, a pass and a place in the team structure. The written contract should reflect these realities, and the day to day working practices must match the contract, because HMRC looks straight through paperwork that does not match what actually happens.
Where the client is responsible, they must give you a Status Determination Statement, often shortened to an SDS, which sets out their decision on your status and their reasons. If you disagree with it, you have the right to challenge it, and the client must respond to your representations within 45 days. It is well worth reading the statement carefully and pushing back where the reasoning does not match how you really work, because a wrong determination costs you money every month.
HMRC provides a free online tool called Check Employment Status for Tax, usually shortened to CEST, which asks a series of questions about the working arrangement and gives a view on status. It is useful as a starting point and HMRC says it will stand by the result if the answers are accurate, but it has been criticised for not handling mutuality of obligation well, so it should be used with care and not relied on blindly in borderline cases.
Some contractors who keep landing inside IR35 decide it is simpler to work through an umbrella company instead of their own limited company. An umbrella employs you, runs you through its payroll, and deducts tax and National Insurance, so IR35 no longer applies because you are genuinely an employee of the umbrella. It removes the admin of running a company, although it also removes the tax efficiency of being outside IR35, so it suits people whose contracts are inside in any case.
Whatever your status, keep your contracts, any Status Determination Statements, notes of how you actually work, and evidence of working for other clients. If HMRC ever questions your status, this is the material that protects you, and memories of working practices from several years ago are rarely good enough on their own.
We review contracts and working practices to assess IR35 status honestly, help contractors structure genuine businesses that sit comfortably outside the rules, challenge wrong determinations, and run the payroll correctly where a contract is inside. If you are not sure where you stand, or you have had a determination you think is wrong, book a free call back and we will look at your situation properly.
It helps to know the history, because it explains the system as it is today. IR35 itself has existed since the year 2000, but for a long time it was the contractor's own company that decided status and accounted for any tax. That changed first in the public sector in 2017, when responsibility moved to the public body using the contractor. Then in April 2021 the same shift reached the private sector for all but small clients, so that medium and large businesses became responsible for deciding status and for deducting the tax where a contract is inside. This reform is the reason so many contractors found their long standing arrangements suddenly reassessed.
When the 2021 reform arrived, some large clients reacted by deciding that every contractor was inside IR35, regardless of the individual facts, simply to remove any risk to themselves. These blanket determinations are not how the rules are meant to work, because each engagement should be judged on its own merits. If you believe you have been swept up in a blanket decision that does not reflect how you actually work, you can and should challenge it through the formal disagreement process, and a well reasoned challenge backed by evidence often succeeds.
When a contract is inside IR35 and the client deducts the tax, the money your company receives has already been taxed, which is called a deemed direct payment. To avoid that income being taxed a second time when you draw it out, your company must record it carefully so that you can take it as salary or dividends without a further charge. Getting this bookkeeping right matters, because mistakes here lead to genuine double taxation, which is exactly what nobody wants.
Being inside IR35 also restricts the expenses you can claim. Many of the costs a contractor outside IR35 can set against income, such as ordinary travel to a regular workplace, are not allowable when inside. A few specific costs remain, but in general the generous expense position of a genuine business falls away. This is another reason the take home difference between inside and outside is so wide, and another reason to make sure a determination is correct before you accept it.
If HMRC challenges your status for past years, it will look at the real working relationship, the contracts and any evidence of how the work was actually carried out. Cases can run for a long time and the sums at stake can be significant, including back tax, interest and sometimes penalties. Good contracts, clear working practices and proper records are your best defence, and professional representation makes a real difference, because status cases turn on fine detail and on how the facts are presented.
Outside IR35 means your contract is genuine self employment, so you can pay yourself tax efficiently in salary and dividends. Inside IR35 means the work is really employment, so most of the fee is taxed as employment income with Income Tax and National Insurance deducted, leaving you with less.
For public sector clients and medium or large private sector clients, the client decides and operates the tax. Only where the client is a small company does your own company remain responsible for deciding your status.
It depends on how you really work, not just the contract. Helpful signs include a genuine right of substitution, control over how you do the work, financial risk, several clients and not being treated like a member of staff. The contract and the day to day reality must match.
It is the written decision a client must give you setting out your IR35 status and their reasons. If you disagree, you can challenge it, and the client has 45 days to respond to your representations.
We review your contracts and working practices, challenge wrong determinations, and make sure you are taxed correctly. Book a free call back and we will look at your situation.