How IR35 Works and What It Means for UK Contractors
IR35 — formally the off-payroll working rules — targets contractors working through a limited company whose arrangements resemble those of an employee. If HMRC determines you fall inside IR35, you face a substantial additional tax bill covering income tax and National Insurance that should have been deducted as if you were employed.
The Employment Status Tests
Substitution
Can you send a substitute to do the work without requiring client approval? Genuine substitution rights — where you would personally pay and be responsible for the substitute — point strongly to being outside IR35 and are a hallmark of self-employment.
Control
Does the client dictate how, where, and when you work? Genuine contractors direct their own methods. If you work the client's hours, use their equipment, and follow their procedures as if you were staff, that indicates employment.
Mutuality of Obligation
Is the client obliged to offer work and are you obliged to accept it? In a genuine self-employed relationship neither party has these obligations.
Who Determines Your Status?
Since April 2021 for the private sector: medium and large clients must issue a Status Determination Statement and bear liability if it is wrong. Small clients — two of: turnover below £10.2m, balance sheet below £5.1m, fewer than 50 employees — leave responsibility with the contractor's PSC.
Inside IR35
The fee-payer deducts income tax and NI from payments to your company before you receive them. You can still pay yourself a small salary but most income is subject to employment-level taxation. You receive no employment rights such as holiday pay or sick pay in return.
Outside IR35
You pay yourself an optimal salary (around the NI secondary threshold, approximately £9,100) and extract additional profits as dividends taxed at lower rates with no NI. You can also retain profits in the company and draw them in future lower-income tax years.
HMRC's CEST Tool
Available at gov.uk/guidance/check-employment-status-for-tax, HMRC commits to standing behind CEST results where information is accurate. The tool has been criticised for inadequately assessing Mutuality of Obligation. For long-term engagements, supplement with a specialist IR35 review from a qualified employment tax adviser.
Protecting Yourself
Ensure your contract reflects genuine self-employment: substitution rights, lack of daily control, financial risk. Actual working practices must match the contract — HMRC looks at reality, not just paperwork. Consider IR35 insurance. Work for multiple clients simultaneously as this is strong evidence of genuine self-employment.