Understanding IR35

IR35 exists to stop someone working like an employee but being paid like a business. If you left a permanent job on Friday and came back on Monday doing the same work, from the same desk, under the same manager — but through a company — the tax system would be losing employment taxes on work that is, in substance, employment.

The rules therefore ask a single question: strip away the contract and the company, and look at how the work is really done. Does the relationship look like employment? If it does, the engagement is 'inside IR35' and should be taxed broadly as employment. If it genuinely does not, it is 'outside IR35'.

There is no statutory checklist. Status comes from decades of employment case law, and three factors carry most of the weight.

Control — how much say the client has over what you do, when, where and how. A genuine contractor is engaged to deliver an outcome, not to be directed through a working day.

Substitution — whether you could send a suitably qualified replacement. A real right of substitution points strongly away from employment, because employment is personal. A clause that exists on paper but would never be honoured in practice carries little weight.

Mutuality of obligation — whether the client must offer work and you must accept it. An employer keeps you occupied; a client buys a defined piece of work and the relationship ends when it is delivered.

Around these sit the secondary indicators: whether you take financial risk, provide your own equipment, work for other clients, and how far you are integrated into the organisation.

Since April 2021, for engagements with medium and large private-sector clients — and across the public sector — the client determines your status, not you. They must give you a Status Determination Statement setting out the decision and their reasoning, and you have the right to challenge it.

Where the client is a small company, responsibility stays with your own limited company. 'Small' is defined by the Companies Act tests on turnover, balance sheet total and employee numbers.

The party that gets it wrong carries the liability, which is why many clients became cautious after the reform, and why blanket 'inside' determinations became common even for engagements that would have withstood scrutiny.

Inside IR35, your fee is treated as employment income. Before you are paid anything, it must absorb employer's National Insurance, the Apprenticeship Levy where it applies, and any umbrella margin. What is left is taxed through PAYE with employee National Insurance on top.

Outside IR35 through a limited company, the money is taxed as business profit — corporation tax first, then income tax on any salary and dividend tax on distributions. There is no employer or employee National Insurance on dividends, which is where most of the difference historically came from.

That gap has narrowed. Dividend tax rates rose two percentage points in April 2026, and employer National Insurance rose to 15% on a much lower threshold in April 2025. Run both calculators against your own rate rather than relying on rules of thumb from a few years ago.