Self-Employment Tax UK 2026/27 — Income Tax, National Insurance, Expenses and IR35IR35 Contractor Guide UK 2026 — Employment Status & Tax Rules
Complete guide to IR35 rules for contractors. Inside vs outside IR35, off-payroll working rules, and how to structure your work legally and tax-efficiently.
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 |
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.