IR35 is a UK tax rule designed to stop “disguised employment.” This happens when a contractor works like an employee but pays less tax by operating through a limited company. In simple terms, IR35 checks whether you should be taxed as an employee or as a self-employed contractor.
Why IR35 Exists
The government introduced IR35 to make sure people doing the same type of work pay similar taxes. Without it, some contractors could reduce their tax bills by taking income as dividends instead of salary.
How IR35 Works
IR35 looks at the working relationship between the contractor and the client. It does not just depend on having a contract in place — it focuses on how the work is carried out.
There are two possible outcomes:
- Inside IR35: You are treated like an employee for tax purposes. You must pay Income Tax and National Insurance like employees.
- Outside IR35: You are genuinely self-employed and can continue to be paid through your company with more tax flexibility.
Key Factors That Determine IR35 Status
Several factors are used to decide whether a contract falls inside or outside IR35:
- Control: Does the client control how, when, and where you work?
- Substitution: Can you send someone else to do the work?
- Mutuality of obligation: Is the client obliged to offer work and are you obliged to accept it?
If the client treats you like a regular employee, the contract is likely inside IR35.
Who Is Responsible?
Responsibility depends on the size of the client:
- Large and medium businesses: The client decides the IR35 status.
- Small businesses: The contractor is responsible for determining their own status.
This change shifted more responsibility onto businesses, making compliance more important.
Impact on Contractors
If you fall inside IR35, your take-home pay may reduce because more tax and National Insurance are deducted. However, you do not receive full employee benefits like holiday pay or pensions, which can feel unfair to many contractors.
Impact on Businesses
Businesses must carefully assess contractor status to avoid penalties. Incorrect decisions can lead to tax liabilities and fines. Many companies now review contracts regularly or seek professional advice to stay compliant.
How to Stay Compliant
To manage IR35 risk:
- Review contracts and working practices
- Use tools like HMRC’s CEST (Check Employment Status for Tax)
- Keep clear records of decisions
- Seek advice from an accountant or tax specialist