IR35 explained: what is inside or outside IR35?

IR35 is a pretty important part of the UK tax system.  

If you’re a founder or limited company director, IR35 determines how much you’re paid when you’re on a contract. FYI: the IR35 rules don’t apply to sole traders (more on this later). 

Figuring out where you stand can be stressful, but we’re here to help. In this guide, we’ll break down what IR35 means, how to tell if you’re inside IR35 or outside IR35, how to avoid IR35 catching you out unfairly, and what to do if a client tells you your status has changed.

Key takeaways

• IR35 decides whether you pay tax like an employee or contractor
• Your status depends on how you work
• Since 2021, medium and large private sector clients are usually responsible for deciding your status, though small companies work differently
• If you’re told you’re inside IR35, you have options — it’s not the final word

IR35, also called off-payroll working rules, is a set of tax rules designed to stop people working like employees while billing like contractors. This is sometimes called disguised employment.

In practice, it looks at how you work with your client. Does that relationship look like you’re an employee or a service provider?

• If you’re inside IR35: HMRC treats you as an employee for tax purposes on that contract. That means income tax and National Insurance are deducted in a similar way to being on a payroll. But you don’t get employee perks like holiday pay or a pension contribution
• If you’re outside IR35: you’re treated as a limited company for that engagement, and you manage your own tax through your limited company as usual

Good to know: whether or not IR35 applies to you can differ contract by contract. You could be outside IR35 with one client and inside it with another, depending on how each engagement works.

Under the IR35 rules, you’re likely to be considered inside IR35 if your working relationship looks a lot like employment, even if your paperwork says that you’re a contractor. 

HMRC looks past the job title on your contract and focuses on what happens day to day between you and your client.

Here are some common signs you might be inside IR35:

• You have to do the work yourself and can’t send someone else in your place
• Your client tells you how, when, and where to do your work
• You’re expected to keep taking on new work from the same client, and they’re expected to keep offering it
• You use their equipment and work alongside their staff as if you were one of the team
• You take on little to no financial risk: you’re paid regardless of how the work turns out

Example: a graphic designer who works Monday to Friday at a client’s office, uses their laptop, reports to a line manager, and has done so for the past two years with no sign of it ending. This relationship looks a lot like full–time employment. In the eyes of HMRC, this set–up could be inside IR35.

Being outside IR35 means HMRC sees you as a limited company when you work with a particular client. 

This applies to a lot of limited company contractors — people who are running their own business and can choose how, when, and by whom the work gets done.  

Here are some common signs you might be outside IR35:

• You could send a suitably qualified substitute to do the work instead of you
• You decide your own hours, methods, and tools (within reason)
• You take on financial risk. For example, you have to fix mistakes in your own time and at your own cost
• You work with multiple clients, not just one, and market your services more widely
• There’s no obligation for the client to offer more work, or for you to accept it, once the contract ends

Example: a freelance copywriter who works with several different clients. They set their own schedule, use their own laptop and software, and would need to redo any work that didn’t meet their client’s brief. In the eyes of HMRC, this set–up would be outside IR35.

Determining your IR35 status isn’t quite as simple as checking a box.

Instead, HMRC (and tribunals, if things go that far) weigh up several factors to work out your status. 

They look at the reality of your working relationship and arrangement, not just what’s written in your contract. Here are the key criteria:

If you’re allowed to send someone else to do the work in your place, and your client would accept that, it’s a strong sign that you’re operating as a limited company. 

It doesn’t need to happen in practice, but you need to have the right to do it.  

This is a mouthful, but it can be summarised as: is your client compelled to keep offering you work, and are you obliged to accept it? 

In a true employer-employee relationship, the employer has to provide future work and the employee has to accept the tasks they’re assigned. But if you’re a limited company, you aren’t obliged to accept further work once you’ve fulfilled the terms of your contract—nor is your client bound to keep offering you work. 

Example: a marketing consultant who’s booked for a one–off, three–month campaign, with no promise of further work once it wraps, is on solid ground here. Whereas a consultant who’s been on a rolling contract and is expected to pick up whatever is thrown at them seems more like an employment relationship. 

How much say does your client have over what you do, how you do it, when you do it, and where? Employees are usually given fixed hours and told how the work needs to be done. Contractors are usually given the outcome they need to deliver and left to get on with it in their own way.

Example: a contractor who’s told the brief and deadline, then left to plan their own hours and approach, is likely outside IR35.

Do you carry any financial risk in the arrangement? Contractors take on more risk than employees because they are paid a fixed price for their work, need to correct any errors in their own time, and invest in their own training and equipment. Employees, in contrast, take home the same amount whether a project goes well or badly.

Example: a contractor who quotes a fixed fee for a project, and has to absorb the cost if it runs over, is carrying real financial risk. One who’s paid a day rate regardless of how the work goes usually isn’t. 

Are you integrated into the business as if you were staff? For example, do you appear on the internal organisation chart or manage employees?

The more embedded you are in the day–to–day running of the organisation, the more it looks a lot like employment.

Do you use your own laptop, software and tools, or does your client give you everything you need? Contractors usually supply their own, so it’s one of the clearer signs you’re running your own show rather than slotting into someone else’s team. For example, let’s picture two freelance bookkeepers: 

• The first works from her own laptop, pays for her own accounting software licence, and does the job from her home office
• The second is given a company laptop, logs into the client’s own software under their licence, and works from a desk at the client’s premises

The first is clearly running her own business. The second looks a lot more like an employee.

IR35 technically applies to people who provide their services through an intermediary, like a limited company you own or work through. 

If you’re a sole trader, working in your own name without a limited company, the IR35 rules themselves don’t apply to you.

That said, HMRC will still look at whether you’re self–employed under general employment status rules. For example, they’ll likely check your Self Assessment tax return. 

So even as a sole trader, it’s worth understanding the same principles as founders and limited company directors: substitution, control, and financial risk. 

If you’re a small company working with clients, IR35 could still apply to you. There’s no special exemption. 

What if your client is a small company? Since April 2021, medium and large private sector clients have been responsible for deciding your IR35 status themselves, rather than leaving it to you. But if your client counts as a small company under the Companies Act, that responsibility stays with you.

A company is currently classed as small if it meets at least two of these three criteria for its financial year:

• Turnover of £15 million or less
• Balance sheet total of £7.5 million or less
• 50 employees or fewer

Good to know: these thresholds just went up for accounting periods starting on or after 6 April 2025 — turnover and balance sheet limits rose from £10.2 million to £15 million, and from £5.1 million to £7.5 million. 

That means around 14,000 UK businesses are set to shift from medium to small, and if your client is one of them, IR35 responsibility moves from them to your own limited company. 

Because company size for IR35 purposes is worked out from the previous year’s accounts, this won’t happen overnight. Most contractors won’t feel the practical effect until the 2026/27 tax year at the earliest, with the majority of affected clients making the switch by 2027/28. It’s a good reason to check in with bigger clients occasionally rather than assuming nothing’s changed. 

First things first, try not to panic. Being told you’re inside IR35 isn’t the end of the world, and it’s not necessarily the end of the story either.

Here are some practical next steps:

• Ask your client how they reached that decision: they should be able to explain the reasoning behind the determination
• Try HMRC’s free Check Employment Status for Tax (CEST) tool: take the test to get your own read of the situation
• Go back to your contract: check it reflects how you work in practice
• If you disagree: most clients have a formal process for you to challenge the determination. Don’t be afraid to use it
• If you’re still unsure: it’s worth getting advice from an accountant or IR35 specialist who can look at the full picture.

Remember, you can be inside IR35 on one contract and outside it on another at the very same time. One determination doesn’t have to define your whole business.

IR35 can feel like a lot to take in, but at its heart, it’s just asking one question: does this working relationship look like employment or like running your own business? 

Once you know what the criteria are looking for, you’re in a much stronger position to understand your own status and to have an informed conversation if a client’s assessment doesn’t sit right with you.

If you’re a sole trader looking to incorporate a company for the first time, our company registration service is quick and easy — you’ll be ready to trade within 24 hours. 

And once you’re trading, a business bank account can make keeping track of contract income and separating it from personal spending a whole lot simpler.

For more ways to start, run, and grow your business, head over to our resource hub. From tax to business expenses, we’ve got you covered. 

It’s not a legal requirement, but many contractors choose to take out IR35 insurance for peace of mind. It usually covers the cost of professional representation if HMRC investigates your status, and in some cases can cover the tax liability itself if you’re found to be inside IR35. It’s worth weighing up against how much risk you’re comfortable carrying yourself.

Yes — your status isn’t fixed forever. It can change between contracts, and even within a contract if the way you actually work changes significantly. If you take on more clients, gain more control over your working methods, or start taking on real financial risk, your status could shift from inside to outside IR35 (or vice versa if things move the other way).

If you’re inside IR35, tax is broadly calculated as if you were an employee — income tax and National Insurance are deducted from your fee before it reaches you, usually by the fee–payer. The exact calculation accounts for a small deemed employment cost deduction, so it’s not always a straightforward employee–style payslip.