IR35, also called the off payroll working rules, makes a contractor working through their own limited company pay broadly the same Income Tax and National Insurance as an employee when the engagement looks like employment. For public sector clients, and for medium and large private sector clients, the client decides status and the fee payer deducts tax. For small private sector clients, the contractor’s own company still decides and accounts for any tax due.

What are IR35 and the off payroll working rules?

IR35 is the common name for the off payroll working rules. They apply when a worker provides services to a client through their own intermediary, usually a personal service company (PSC), and would have been an employee if they had worked for that client directly. HMRC’s aim is simple: the worker should pay broadly the same tax and National Insurance as an employee doing the same job.

The rules work contract by contract. You can have one engagement inside IR35 and another outside it at the same time. They are unlikely to apply if you are employed through an umbrella company, because you are already on a payroll.

Who decides IR35 status, the client or the contractor?

It depends on who the client is.

Public sector and medium or large private sector clients

Public authorities have been responsible for deciding status since 6 April 2017. From 6 April 2021 the same responsibility moved to medium and large clients in the private and voluntary sectors. The client must take reasonable care, reach a view and issue a status determination statement (SDS) giving its conclusion and the reasons for it. The SDS goes to the worker and to whoever the client contracts with, such as an agency.

Small private sector clients

If the client is small, the decision stays with the contractor’s own company. The client does not issue an SDS, but it must confirm its size if the worker or agency asks.

What counts as a small company for IR35?

A private sector client company is medium or large if it meets two or more of these conditions: turnover above £10.2 million, balance sheet total above £5.1 million, more than 50 employees. The test uses the last financial year whose accounts filing deadline fell before the start of the tax year, and a company changes size only after meeting the conditions for two consecutive financial years. Group rules apply, so a subsidiary of a medium or large parent is caught too.

The Companies Act limits rose to £15 million turnover and £7.5 million balance sheet (50 employees unchanged) for financial years beginning on or after 6 April 2025. Because of the filing date look back and the two year rule, HMRC’s own manual says the earliest tax year the higher limits can change a client’s IR35 size is 2027/28. So some clients currently applying the rules may become small from 6 April 2027, not 2026.

Did IR35 change in April 2026?

The core off payroll rules did not change in April 2026. What did start on 6 April 2026 was a separate set of PAYE rules for umbrella company supply chains, making the agency (or the end client where there is no agency) responsible for PAYE being operated correctly by the umbrella. Those rules do not apply to contractors engaged through their own personal service company where the off payroll conditions are met.

How do I know if I am inside IR35?

There is no single test. HMRC and the courts look at the whole picture, both the written contract and how the work actually happens day to day. The main factors are:

  • Control: who decides what you do, and when, where and how you do it.
  • Substitution: whether you have a genuine right to send someone else in your place, and whether the client would accept it. A right that exists only on paper carries little weight.
  • Mutuality of obligation: whether the client must offer work and you must accept it.

Other points include financial risk, providing your own equipment, how you are paid, whether you are part and parcel of the client’s organisation, and the length of the engagement. If working practices change or a new contract is signed, status should be checked again.

Is the CEST tool reliable?

Check Employment Status for Tax (CEST) is HMRC’s free online tool. Anyone can use it, including clients, workers and agencies, and it is anonymous. HMRC says it will stand by the result as long as the information you give is accurate and in line with its guidance, and a CEST result can be used as a valid SDS. The weak point is the input. If your answers do not reflect the real working arrangements, the result offers no protection, so keep a copy of your answers alongside the contract.

What happens if a contract is inside IR35?

When the client decides status

The deemed employer, usually the fee payer (the party that pays your company, often an agency), deducts Income Tax and employee National Insurance from your invoices and pays employer National Insurance and any Apprenticeship Levy on top. Until the client passes on its SDS, the client itself carries that liability. Student and postgraduate loan repayments are not deducted by the deemed employer; you report them through Self Assessment.

When your company decides status for a small client

Your PSC works out a deemed employment payment at the end of the tax year. It starts with the income from inside IR35 engagements, deducts a flat 5% for running costs, then allowable expenses, pension contributions, salary already paid and employer National Insurance. Any positive balance is taxed as employment income. This changes how you should think about salary and dividends; our guide to salary vs dividends for a limited company explains the usual position outside IR35.

Can I challenge a status determination statement?

Yes. The worker or the deemed employer can dispute an SDS with the client at any point until the last payment for the engagement is made. The client must reply within 45 days, either confirming its decision with reasons or issuing a new one. Carry on under the original determination while you wait. If the client fails to respond in time, the tax and National Insurance become the client’s responsibility. For a wider view of contractor and company tax topics, see our accountancy and tax guide.

What if HMRC opens an IR35 enquiry into my company?

IR35 enquiries tend to be long and detailed, with HMRC asking for contracts, emails, timesheets and evidence of working practices, often across several tax years. Our separate page on what to expect in an HMRC IR35 enquiry walks through the process step by step.

Professional fees for defending an enquiry can build up quickly even when you are right. Solar Protect tax investigation insurance covers up to £100,000 of accountant’s fees with no excess. You can read how the cover works on our tax investigation insurance page. When you are ready, you can get a quote for Solar Protect cover online.

Related guides: tax investigation insurance for contractors.

Reviewed by Matthew Bartlett, Director, Solar Protect. Last reviewed 29 September 2026. This guide is general information, not personalised tax or financial advice. Figures are correct for the 2025/26 and 2026/27 UK tax years at the time of writing.