What is IR35? A plain-English guide

IR35 is the UK's set of rules for contractors who work through a Ltd company. They decide whether your working relationship looks more like genuine business-to-business work (good — outside IR35) or disguised employment (bad — inside IR35). The decision changes how much tax you pay, sometimes by thousands a year.

The problem IR35 solves (from HMRC's view)

A regular employee has tax deducted at source through PAYE: income tax, employee National Insurance, and the employer pays employer NI on top. A Ltd company director can structure their pay much more efficiently — a small salary up to the personal allowance, dividends for the rest — and keep substantially more.

Without IR35, every employee could in theory quit on Friday, set up a Ltd company, and contract back to their employer on Monday for the same job — paying significantly less tax. IR35 exists to prevent that.

How status is determined

IR35 status is decided by case-law factors that look past the contract paperwork at how you actually work. The big three:

• Right of substitution — can you send another qualified person from your business to do the work? A genuine, unfettered substitution right is the strongest outside-IR35 indicator there is.
• Control — does the client tell you how, when, and where to work? High control points to inside IR35.
• Mutuality of obligation — is there an ongoing commitment for the client to offer work and for you to accept it? Yes points to inside.

Other factors come into play too: who provides equipment, whether you bear financial risk, whether you have multiple clients, whether there's an exclusivity clause, and whether you're integrated into the organisation like an employee.

Who decides — you or the client?

Since 2021, off-payroll working rules put status responsibility on the engaging client for medium and large private-sector engagements (and all public-sector engagements since 2017). The client must issue a Status Determination Statement.

For small private-sector clients (broadly: under £10.2M turnover), the original IR35 rules still apply — responsibility stays with the contractor.

What it costs you to be inside IR35

Inside IR35 means you're a deemed employee for tax purposes. PAYE applies. The salary/dividend efficiency disappears. For a £500/day contractor working 230 days a year, the difference between inside and outside is typically several thousand pounds a year.