IR35 explained: inside or outside for UK contractors

IR35, also called the off-payroll working rules, exists to stop people working like employees while paying tax like a business. If you contract through your own limited company, it decides whether the money you earn is taxed as business income or as employment income.

The short version

• Outside IR35: you are treated as genuinely in business. A limited company can pay you through a mix of salary and dividends.
• Inside IR35: the engagement is treated as employment for tax. Income tax and National Insurance are deducted before you are paid.

Who decides your status

It depends on the client.

• Public sector clients decide your status.
• Medium and large private sector clients decide your status. They must give you a status determination statement with their reasons, and a way to disagree.
• Small private sector clients do not make the decision. Your own company does.

If you are unsure which applies, ask your agency or end client. The answer shapes who is responsible for getting the decision right.

What a status decision looks at

No single question decides it. The overall picture does. The common areas are:

• Control: who decides what is done, how, when and where.
• Substitution: whether you can send someone else in your place, and whether the client would accept them.
• Mutuality of obligation: whether the client must offer work and you must accept it.
• Financial risk: whether you carry real risk, for example fixing your own errors at your own cost.
• Part and parcel: whether you are treated and integrated like the client’s own staff.
• Equipment and expenses: what you supply and pay for yourself.

What it means for your pay

If a contract is inside IR35, the fee payer works out a deemed employment payment, deducts income tax and National Insurance, and pays you the rest. You do not get the dividend route on that income. Many contractors in this position use an umbrella company, which makes the PAYE side simpler, or keep their own company and run the deemed payment through it.

The gap between inside and outside can be large. At a £500 day rate, our 2026/27 example shows a contractor keeping roughly £69,000 a year outside IR35 through a limited company, and roughly £64,600 inside. Your figures will differ.

Why evidence matters

A contract helps, but status is judged on how the work really happens. If day-to-day practice drifts away from the contract, the contract carries less weight.

Practical habits that help:

• Keep dated notes of how work is directed and by whom.
• Keep emails and messages that show how decisions were made.
• Record when you used your own methods, tools or substitutes.
• Revisit your assessment if your role or the way you work changes.

Checking your own position

HMRC has its own online tool for checking employment status, and specialist advisers can give you a formal view. A structured self-check, such as the one in the Paylift app, helps you spot where your working practices and contract point in different directions, and keeps your notes with the result.

General information, not legal or tax advice. Rules change, so check gov.uk or take advice for your own situation.