IR35 is one of the most misunderstood pieces of tax legislation in the UK. Here's what it actually means, how to know if it applies to you, and what happens if you get it wrong.
If you work as a contractor or freelancer operating through a limited company, IR35 is something you cannot afford to ignore. Yet it remains one of the most confusing areas of tax law — even for people who've been contracting for years.
Here's what IR35 actually means, in plain English.
IR35 is the informal name for rules in the UK tax code designed to tackle what HMRC calls "disguised employment" — situations where someone is, in substance, an employee of a client, but is paid through a personal service company (PSC) to reduce tax and National Insurance contributions.
The name comes from the original Inland Revenue press release number 35 from 2000, when the rules were introduced.
The core question IR35 asks is: if the intermediary (your limited company) didn't exist, would you be an employee of the end client?
If the answer is yes, you are "inside IR35" and must pay income tax and NICs as if you were employed. If the answer is no — you're genuinely in business for yourself — you are "outside IR35" and can continue to operate as normal.
The tax difference between inside and outside IR35 is significant. A contractor operating outside IR35 can pay themselves a combination of salary and dividends, with dividends taxed at lower rates than income. Inside IR35, effectively all income from the engagement is treated as employment income and taxed accordingly — including employer's National Insurance contributions, which fall on the contractor's company.
For a contractor earning £500 per day, the difference can be tens of thousands of pounds per year.
HMRC uses a framework of employment status tests to determine IR35 status. The three most important are:
1. Substitution Can you send a substitute to do the work instead of you? If your contract (and the reality) allows you to provide a different person to fulfil the engagement, this points toward being outside IR35. If the client specifically requires you personally, this points toward being inside.
2. Control Who controls how, when, and where the work is done? If the client dictates your hours, your working methods, and your location to the same degree as an employee, this suggests employment. If you have genuine autonomy over how you deliver the work, this points outside.
3. Mutuality of obligation Is the client obliged to offer you work, and are you obliged to accept it? In a genuine contract arrangement, neither party has an ongoing obligation once the project ends. If the client expects you to show up every day and you expect to be paid regularly regardless of distinct projects, mutuality of obligation exists — pointing toward employment.
No single test is conclusive. HMRC and tribunals look at the overall picture of the working relationship.
Upload any UK legal document and get an instant AI breakdown — clause by clause, risk by risk, in plain English.
Since April 2021 (following a reform that was originally planned for 2020), the rules about who determines IR35 status changed significantly:
If you work for a medium or large private sector company, they will issue you with a Status Determination Statement (SDS) setting out their view of your IR35 status. You have the right to dispute this through the client's formal disagreement process.
HMRC provides a free online tool — Check Employment Status for Tax (CEST) — at gov.uk/guidance/check-employment-status-for-tax. You can answer questions about your working arrangements and receive an indication of your IR35 status.
CEST is useful but imperfect. HMRC has stated it will stand by CEST results, but the tool has been criticised for not properly weighing all relevant factors. It should be used as a guide, not a definitive answer.
If a client incorrectly places you inside IR35, you can:
Many contractors accept inside-IR35 determinations without challenge. Where the assessment appears genuinely wrong, a formal dispute is worth pursuing.
Many contractors who are placed inside IR35 work through umbrella companies instead of their own limited company. An umbrella company employs you directly, processes PAYE on your income, and charges the end client a margin.
This avoids IR35 complexity but typically results in a lower take-home than a legitimately outside-IR35 limited company arrangement. Be wary of umbrella companies offering tax-avoidance schemes — HMRC is actively pursuing these.
Disclaimer: This article is for general information only and does not constitute legal or tax advice. IR35 is complex and the consequences of getting it wrong are significant. Consult a qualified accountant or tax adviser experienced in contractor taxation. IPSE (ipse.co.uk) and the FCSA (fcsa.org.uk) are useful resources for contractors.
Upload any UK legal document and get an instant AI breakdown — clause by clause, risk by risk, in plain English.
Related Guides
Freelancing without a proper contract is one of the most common and costly mistakes self-employed people make. Here's what a solid UK freelance contract must include — and why it matters.
Late payment is the single biggest cash flow threat for UK freelancers. Here's what the law says, how to charge statutory interest, and how to get paid without burning the relationship.