What Is IR35? Off-Payroll Working Rules Explained
IR35 is one of the most important tax rules for UK contractors. It determines whether you pay tax like an employee or like a self-employed person. Getting it wrong can result in a large unexpected tax bill.
This guide explains what IR35 is and what changed in 2021. It covers what those changes mean for you.
What is IR35?
IR35 is UK tax legislation that determines 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 take-home pay.
HMRC introduced IR35 in 2000 to stop contractors disguising employment as self-employment. The core idea is simple. If you work like an employee, you should pay tax like one. The legal vehicle you use, a limited company or otherwise, doesn't change that.
The name IR35 comes from the original Inland Revenue press release. The rules themselves are now part of ITEPA 2003, but the nickname stuck.
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 date, 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 assessed themselves as outside IR35 and structured their pay accordingly. Some were wrong. HMRC pursued a number of those cases. The government decided the self-assessment model wasn't working.
The public sector made the same shift in 2017. The private sector followed four years later. Medium and large hirers must issue a Status Determination Statement. They must do this before you start work. That document sets out their IR35 decision and the reasoning behind it.
This was a significant shift. 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 agency-placed contractors work with medium or large hirers. That means the hirer issues the determination. Your agency sits in the middle and passes the liability down the chain.
If the hirer says outside IR35, you can operate through your limited company. You pay tax on dividends as before. If they say inside IR35, you pay PAYE tax on everything. Your structure doesn't change the tax outcome.
Hirers must take reasonable care when making the determination. They can't issue blanket inside-IR35 decisions without assessment. 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 assessing IR35 status. Hirers and contractors both use it. You answer questions about the engagement and CEST returns a determination. 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 15-20 minutes to complete. It returns one of three outcomes: employed, self-employed, or unable to determine.
The tool has known limitations. It doesn't ask about mutuality of obligation, which is a key employment law test. Some tax professionals consider this a significant gap. A CEST result of outside IR35 doesn't stop HMRC investigating. Other evidence can still point differently.
CEST is widely used, but it's not legally binding. A specialist employment status lawyer or tax advisor gives a more thorough 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 the simplest route when you're inside IR35. The umbrella employs you, invoices your agency or hirer, and processes 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 don't get as a limited company director.
Inside IR35 with a limited company, the fee-payer deducts PAYE before paying your company. That's usually the agency. You lose the dividend tax efficiency. The limited company costs remain but deliver no 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, you have more flexibility and more responsibility. You manage your own company accounts, file returns, pay corporation tax, and keep records. Most contractors use an accountant to handle this.
The risk with outside-IR35 engagements is that HMRC may investigate and disagree with the determination. If HMRC challenges successfully, the fee-payer or hirer carries the liability post-2021. Not you. If you made the determination 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 doesn't need to assess you. The whole IR35 question is bypassed.
This is one of the main reasons contractors choose umbrella after 2021. There's no status uncertainty and no determination to challenge. No unexpected tax bill from HMRC either.
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 direct contractors toward compliant umbrellas. It gives contractors a reason to check their 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 compliance page.
Want to see your take-home as an umbrella contractor? Try the DASA 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 operate 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 remains tax-efficient. You pay corporation tax on profits, take a low salary, and extract dividends. At day rates above £300-£400, this often outperforms umbrella on take-home pay.
The key question is whether your engagements are, and will stay, outside IR35. If you move between inside and outside IR35 contracts, umbrella is often the easier choice. It works consistently across both.
Our umbrella vs limited company guide 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 provide reasons. If they don't change the determination, you can take it further with HMRC or seek specialist advice.
Start by asking the hirer to explain their reasoning in writing. Sometimes the determination is based on a default position rather than a proper assessment. Hirers who issue blanket decisions without reviewing individual contracts can face liability themselves.
An employment status specialist can review your contract and working practices. They assess whether the determination holds up. The key tests are control, substitution, and mutuality of obligation.
While any challenge is live, many contractors continue working inside IR35 via umbrella. It keeps things clean. Our umbrella pay and tax guide covers how deductions work in practice.
Visit the DASA homepage to get started. Or read our sole trader vs limited company vs umbrella guide for the full structure comparison.
FAQ
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.
