IR35 Explained: What It Is and How It Affects Contractors (2025/26)

IR35 is the rule that hangs over every limited-company contractor — and few topics in contracting cause more confusion or anxiety. Here’s a clear explanation of what it is, who decides, and what’s at stake.

What is IR35?

IR35 — officially the off-payroll working rules — is tax legislation designed to catch contractors who work through their own limited company but who, in substance, work just like an employee of their client. HMRC calls these “disguised employees.”

The logic: if you’d be an employee but for the company you’ve placed between you and the client, you should be taxed like one. So IR35 decides whether a particular contract is:

• Outside IR35 — you’re a genuine business, taxed efficiently as one, or
• Inside IR35 — you’re treated as an employee for tax, losing much of the advantage of your company

The difference in take-home can be substantial — often 20–25%.

Who decides your status?

This is where the rules changed significantly:

• Public sector and medium/large private-sector clients: the end client assesses your status, and the party paying your company (the “fee-payer”) deducts tax at source if you’re inside.
• Small private-sector clients: you (via your limited company) remain responsible for determining your own status and getting the tax right.

So for many contracts you no longer decide your own status — but you live with the consequences, so understanding it still matters.

How status is determined

IR35 isn’t about your contract’s wording alone — it’s about the reality of how you work. The three core tests are:

1. Personal service / substitution — could you genuinely send a substitute to do the work, or must it be you personally? A real right of substitution points to being outside.
2. Control — does the client direct how, when and where you work, like a boss? More control points to inside.
3. Mutuality of obligation (MOO) — is the client obliged to offer work and you obliged to accept it (like employment), or is it project-by-project?

Other factors matter too: financial risk, providing your own equipment, not being “part and parcel” of the organisation, and working for multiple clients.

You can check an indicative status using HMRC’s CEST tool — we explain it in CEST and checking your IR35 status.

Inside vs outside — what changes

The practical impact is big, which is why contractors care so much:

• Outside IR35: take a small salary plus dividends, claim business expenses — the efficient limited-company structure. Use our salary & dividend calculator to see what you keep.
• Inside IR35: taxed broadly as an employee, with Income Tax and NI on most of your income and far less flexibility.

We compare them in detail in inside vs outside IR35.

Why it pays to get it right

IR35 status affects your take-home, your risk, and how you should structure your work. Getting a determination wrong — or not keeping evidence to support an outside position — can lead to a large, backdated tax bill if HMRC challenges it.

Our accountants for contractors review your contracts and working practices, help you understand and evidence your IR35 position, and structure your pay efficiently where you’re legitimately outside — so you keep what you’re entitled to and stay defensible if questioned.