IR35 is tax legislation that determines if a contractor is 'really' an employee for tax purposes. If 'inside IR35', you pay employee-level tax without employee benefits. If 'outside IR35', you can use a limited company for dividend income and lower tax. The rules changed in 2021, making clients responsible for determination.

How do I know if I'm inside or outside IR35?

Key tests: Control (client controls how/when you work?), Substitution (can you send someone else?), Mutuality of Obligation (ongoing work guaranteed?). Inside = more like employment. Outside = more like genuine self-employment. Since 2021, medium/large clients must determine your status.

Is it still worth contracting inside IR35?

Marginally. You lose dividend advantages but may still earn more than permanent employees due to day rates. Many contractors target outside-IR35 roles or go permanent. Compare: day rate vs perm salary, then factor in benefits, holiday, pension, job security.

IR35 Contractor Guide UK 2026 — Employment Status & Tax Rules | PocketWise

IR35 significantly affects contractor take-home pay. Understanding the rules helps you structure your work correctly and make informed decisions.

What Is IR35?

The Core Concept

Status	Tax Treatment
Outside IR35	Use limited company, pay dividends, lower tax
Inside IR35	Taxed like employee via PAYE

Why It Exists

HMRC Concern	Rule Response
“Disguised employees”	Should pay employee taxes
Working exclusively for one client	Looks like employment
Controlled like an employee	Should be taxed as one

The Employment Status Tests

Three Key Factors

Test	Outside IR35 (Self-Employed)	Inside IR35 (Employee-like)
Control	You decide how, when, where	Client dictates method and hours
Substitution	Can send qualified replacement	Must do work personally
Mutuality of Obligation	No guaranteed ongoing work	Ongoing engagement expected

Secondary Indicators

Factor	Outside IR35	Inside IR35
Equipment	Provide your own	Client provides
Financial risk	Bear profits/losses	No risk
Part of organisation	Separate	Integrated
Multiple clients	Yes	Exclusive
Regular salary	No (project-based)	Regular payments
Benefits	None	Holiday pay, sick pay

Weight of Evidence

Strength	Importance
Control	Very High
Substitution	Very High
Mutuality	High
Other factors	Supporting evidence

No single factor is conclusive — it’s the overall picture.

Who Determines Status?

Post-April 2021 Rules (Off-Payroll Working)

Client Size	Who Determines	Who Deducts Tax
Small (exempt)	Contractor	Contractor’s company
Medium/Large	Client	Fee payer (client or agency)

Small Company Exemption

To Be “Small”, Must Meet 2 of 3:	Threshold
Annual turnover	Under £10.2m
Balance sheet total	Under £5.1m
Employees	Under 50

If client is “small”, old rules apply — contractor determines own status.

Status Determination Statement (SDS)

What It Is
Written determination	By client
Must be given	Before work starts
Must explain reasons	Why inside/outside
Can be challenged	Disagreement process exists

Inside vs Outside IR35: Tax Comparison

£500/Day, 220 Days/Year Example

Outside IR35:

Item	Amount
Gross billing	£110,000
Business expenses	-£5,000
Corporation Tax (25%)	-£26,250
Salary (to NI threshold)	£12,570
Dividends	£50,000
Tax on dividends	~£4,000
Total income	~£62,570
Total tax paid	~£30,250
Effective tax rate	~29%

Inside IR35:

Item	Amount
Gross billing	£110,000
Deemed employment payment	After allowances ~£95,000
Income Tax	~£25,432
Employee NI	~£5,034
Employer NI (from your fee)	~£11,380
Take-home	~£53,154
Effective tax rate	~52%

Difference: ~£9,400/year less inside IR35

Compare Day Rates

Scenario	Outside IR35	Inside IR35
£400/day	Viable	Barely better than perm
£500/day	Attractive	Worth considering
£600/day	Very attractive	Reasonable
£700/day	Excellent	Still good

Challenging a Determination

Steps If You Disagree

Step	Action
1	Review the SDS reasoning
2	Respond in writing within 45 days
3	Provide counter-evidence
4	Client must respond within 45 days
5	If still disagree, may need to decline contract

Strong Counter-Evidence

Evidence	Why It Helps
Right of substitution in contract	Key factor
Evidence of past substitution	Proves it’s real
No control over working method	Key factor
Fixed project scope	Not ongoing employment
Working for other clients	Not exclusively engaged

Working Practices

Changing Working Practices

Practice	Outside IR35	Inside IR35
Schedule	Set your own	Client dictates
Location	Choose yourself	Client mandates
Equipment	Provide your own	Client supplies
Supervision	Self-directed	Managed
Method	Your expertise	Client’s processes

Contract vs Reality

HMRC Looks At	Why
Contract terms	What was agreed
Actual working practices	What really happens
Both must align	Contract alone not enough

Options for Inside IR35

Operating Inside IR35

Option	Pros	Cons
Stay Ltd, umbrella	Simple	Fees, no flexibility
Umbrella company	Very simple	Extra fees (~5%)
Permanent role	Benefits, security	Lower rate
Find outside-IR35 role	Tax efficiency	Fewer opportunities

Umbrella Company Costs

Item	Typical Cost
Margin	£15-30/week
Employer NI	13.8% (from your fee)
Apprenticeship levy	0.5% (from your fee)
Total overhead	~15-20% of billing

Inside IR35 vs Permanent

Factor	Inside IR35 Contractor	Permanent Employee
Day rate/salary	£500/day = ~£110k	£80k salary
Holiday	None paid	25-30 days paid
Sick pay	None	Usually paid
Pension	None from client	5% match
Job security	Contract ends	Redundancy rights
IR35 tax	Employee level	Employee level

Inside IR35 rate needs to be significantly higher to beat permanent.

Public vs Private Sector

Key Differences

Sector	IR35 Enforcement
Public	Strict since 2017
Private	Reformed April 2021

Public Sector Approach

Characteristic
Blanket determinations	Some departments
Inside IR35 dominant	Most roles
Outside IR35	Rare, specific roles

Planning Strategies

Legitimate Approaches

Strategy	How It Works
Multiple clients	Demonstrates business
Project-based work	Clear scope and end
Substitution clause	And use it
Own equipment	Genuine investment
Business premises	Optional but helpful
Professional insurance	Business indicator

Things That Don’t Help

Ineffective	Why
Contract wording alone	Reality matters
Using agency	Doesn’t change status
Adding breaks	If same client, still relevant
Claiming expertise	Most employees have expertise

CEST Tool

HMRC’s Check Employment Status for Tax

Feature
Found at	gov.uk/guidance/check-employment-status-for-tax
Purpose	Determine inside/outside
HMRC-approved	They’ll usually accept result
Criticisms	Binary questions, edge cases

CEST Tips

Advice
Answer honestly	About reality, not hopes
Note “undetermined” results	May need specialist advice
Keep completed version	For records
Client may use different tool	Be prepared for difference

Key Takeaways

Control and substitution — most important factors
Client determines — for medium/large companies (since 2021)
Inside IR35 costs ~10-20% — of contractor income
Contract AND reality — both must support status
Permanent may be better — than low inside-IR35 rates
Specialist advice essential — for complex situations

For related content, see our dividend vs salary calculator, take-home pay calculator, and self-employment guide.