IR35 is one of the key tax rules for UK contractors. It decides whether you pay tax like an employee or like a self-employed person. Get it wrong, and you could end up with a big tax bill you were not expecting.
This guide explains what IR35 is and what changed in 2021. It also covers what those changes mean for you.
What is IR35?
IR35 is UK tax legislation that decides whether a contractor working through an intermediary, usually a limited company, should be treated as an employee for tax purposes. If you’re inside IR35, you pay Income Tax and National Insurance as if you were directly employed. If you’re outside IR35, you pay tax as a self-employed person and keep more of your take-home pay.
HMRC brought in IR35 in 2000 to stop contractors from making employment look like self-employment. The idea is straightforward. If you work like an employee, you should pay tax like one. The legal structure you use, whether that is a limited company or something else, does not change that.
The name IR35 comes from the original Inland Revenue press release. The rules now sit inside ITEPA 2003, but the nickname stayed.
What changed in April 2021?
From April 2021, medium and large private sector hirers became responsible for deciding a contractor’s IR35 status, not the contractor. Before that, contractors using limited companies made their own status decisions. The 2021 reform moved that responsibility to the end hirer or client.
Before 2021, many contractors decided they were outside IR35 and paid themselves accordingly. Some got that wrong. HMRC went after a number of those cases. The government decided the self-assessment model was not working.
The public sector made the same change in 2017. The private sector followed four years later. Medium and large hirers must issue a Status Determination Statement before you start work. That document sets out their IR35 decision and the reasons for it.
This was a major change. It moved risk from the contractor to the supply chain.
Who determines your IR35 status now?
Your end hirer determines your status if they’re a medium or large organisation. Small companies are exempt, and in those engagements you still decide your own status. A company is small if it meets two of three criteria: fewer than 50 employees, annual turnover under £10.2 million, or balance sheet total under £5.1 million.
Most contractors placed through agencies work with medium or large hirers. In those cases, the hirer issues the determination. Your agency sits in the middle and passes the liability down the chain.
If the hirer says you’re outside IR35, you can work through your limited company. You pay tax on dividends as usual. If they say you’re inside IR35, you pay PAYE tax on everything. Your structure does not change the tax result.
Hirers have to take reasonable care when they make the determination. They cannot hand out blanket inside-IR35 decisions without looking at the role. If they do, they carry the liability themselves.
What is the CEST tool?
CEST stands for Check Employment Status for Tax. It’s HMRC’s online tool for checking IR35 status. Hirers and contractors both use it. You answer questions about the engagement and CEST gives a result. HMRC says it will stand by CEST results, but only if the information entered is accurate and complete.
CEST asks about control, substitution, and other employment factors. It takes around 15 to 20 minutes to complete. It gives one of three outcomes: employed, self-employed, or unable to determine.
The tool has known limits. It does not ask about mutuality of obligation, which is a key employment law test. Some tax professionals see that as a serious gap. A CEST result of outside IR35 does not stop HMRC from investigating. Other evidence can still point the other way.
CEST is widely used, but it is not legally binding. A specialist employment status lawyer or tax advisor can give a fuller assessment.
What happens if you’re inside IR35?
If you’re inside IR35, you pay Income Tax and Employee National Insurance at source, just like a permanent employee. Your take-home pay is lower than an equivalent outside-IR35 contractor. But your tax is handled for you. There are no Self Assessment returns to file for that income and no risk of an unexpected year-end tax bill.
Working through an umbrella company is usually the simplest option when you’re inside IR35. The umbrella employs you, invoices your agency or hirer, and runs your pay through PAYE. Everything is deducted correctly from day one.
You also get employment rights through the umbrella. That includes holiday pay, statutory sick pay, and pension auto-enrolment. These are rights you do not get as a limited company director.
Inside IR35 with a limited company, the fee-payer deducts PAYE before paying your company. That is usually the agency. You lose the dividend tax efficiency. The limited company costs stay, but they do not bring any benefit.
What happens if you’re outside IR35?
If you’re outside IR35, you operate as genuinely self-employed for tax purposes. Through a limited company, you pay yourself a low salary and take the rest as dividends, which are taxed at a lower rate than Income Tax. This gives you more take-home pay at higher earnings.
Outside IR35 gives you more flexibility and more responsibility. You handle your own company accounts, file returns, pay corporation tax, and keep records. Most contractors use an accountant to deal with this.
The risk with outside-IR35 contracts is that HMRC may investigate and disagree with the decision. If HMRC wins, the fee-payer or hirer carries the liability after 2021, not you. If you made the decision yourself for a small hirer, you carry the liability.
How does IR35 affect umbrella contractors?
Umbrella contractors are always inside IR35 by design. The umbrella employs you and pays PAYE from the start. There’s no IR35 determination to worry about. Your agency or hirer does not need to assess you. The whole IR35 question is bypassed.
This is one of the main reasons contractors choose an umbrella after 2021. There is no status uncertainty and no determination to challenge. There is also no surprise tax bill from HMRC.
From April 2026, the Joint and Several Liability rules also apply. Under JSL, agencies are jointly liable for unpaid PAYE. That applies if an umbrella fails to pay HMRC. This gives agencies a strong reason to steer contractors toward compliant umbrellas. It also gives contractors a reason to check an umbrella’s compliance credentials before signing up.
DASA holds dual accreditation from both FCSA and Professional Passport. These are the two main compliance bodies for UK umbrella companies. Dual accreditation means two separate bodies have audited DASA and confirmed it operates correctly. You can read more on our FCSA and Professional Passport accreditation.
Want to see your take-home as an umbrella contractor? Try the umbrella pay calculator.
How does IR35 affect limited company contractors?
If you’re a limited company contractor inside IR35, your fee-payer deducts PAYE before paying your company. You can still invoice and run the company, but the tax treatment is the same as employment. The dividend advantage disappears. Running costs stay the same. Many contractors switch to umbrella in this situation.
Outside IR35, a limited company is still tax-efficient. You pay corporation tax on profits, take a low salary, and extract dividends. At day rates above £300-£400, this often beats umbrella on take-home pay.
The big question is whether your contracts are, and will stay, outside IR35. If you move between inside and outside IR35 contracts, umbrella is often the easier option. It works the same way across both.
Our umbrella vs limited company runs through the full comparison with numbers.
What should you do if you disagree with a determination?
If your hirer says inside IR35 and you think they’re wrong, you can raise a formal disagreement. Hirers must respond within 45 days. They must give reasons. If they do not change the determination, you can take it further with HMRC or get specialist advice.
Start by asking the hirer to explain their reasoning in writing. Sometimes the decision is based on a default position rather than a proper review. Hirers who issue blanket decisions without looking at individual contracts can end up with the liability themselves.
An employment status specialist can review your contract and working practices. They can check whether the determination stands up. The main tests are control, substitution, and mutuality of obligation.
While a challenge is in progress, many contractors keep working inside IR35 through an umbrella. It keeps things simple. Our umbrella contractor pay and tax guide covers how deductions work in practice.
Many contractors work via an IR35 umbrella company while a status challenge is in progress. Or read our sole trader vs limited company vs umbrella for the full structure comparison.
Frequently Asked Questions
What is IR35?
IR35 is UK tax legislation that determines whether a contractor working through an intermediary should be taxed as an employee. If you’re inside IR35, you pay PAYE tax. If you’re outside, you’re treated as self-employed for tax purposes.
What changed with IR35 in April 2021?
From April 2021, medium and large private sector hirers became responsible for determining a contractor’s IR35 status, not the contractor. Before that, limited company contractors made their own status decisions.
What does inside IR35 mean?
Inside IR35 means HMRC treats you as an employee for tax purposes. You pay Income Tax and National Insurance at source on your earnings, the same as a permanent employee.
What does outside IR35 mean?
Outside IR35 means you’re treated as genuinely self-employed for tax. Through a limited company, you can pay yourself via dividends at a lower tax rate, keeping more of your earnings.
What is the CEST tool?
CEST is HMRC’s Check Employment Status for Tax tool. Hirers use it to assess whether a contractor engagement falls inside or outside IR35. HMRC will stand behind a CEST result only if the information entered is accurate.
Does an umbrella company solve IR35?
Yes, in practice. Umbrella contractors are always employed and always inside IR35 by design. There’s no determination needed. Tax is handled through PAYE from day one, with no risk of a status challenge.
What is Joint and Several Liability in IR35?
From April 2026, agencies are jointly liable for unpaid PAYE if an umbrella company fails to pay HMRC. This gives agencies a strong reason to use only compliant umbrella companies.
