IR35 is one of the most important — and most misunderstood — pieces of UK tax legislation for contractors. Whether you work through your own limited company or are weighing up an umbrella company, understanding how IR35 works will help you avoid unexpected tax bills and choose the right way to get paid.
What is IR35?
IR35, also known as the off-payroll working rules, was introduced in 2000 to tackle “disguised employment”. It applies where a contractor provides services through an intermediary — usually their own personal service company (PSC) — but would be treated as an employee if they were engaged directly by the client.
Where IR35 applies, the contractor is taxed in broadly the same way as an employee: income tax and National Insurance are due on the fees, rather than the contractor taking a mix of low salary and dividends through their company.
Who decides your IR35 status?
- Public sector clients have been responsible for deciding status since April 2017.
- Medium and large private sector clients have been responsible since 6 April 2021. They must issue a Status Determination Statement (SDS) explaining their decision and the reasons for it.
- Small private sector clients are exempt from these duties. Where the client is small, the contractor’s own company remains responsible for deciding whether IR35 applies.
Where the client decides you are “inside IR35”, the fee payer (usually the agency or the client paying your company) must deduct income tax and employee National Insurance, and pay employer National Insurance, before paying your company.
The small company exemption and the 2026 threshold changes
A private sector client counts as “small” if it meets at least two of the size conditions under company law. From 6 April 2026 the financial thresholds increased:
| Condition | Previous threshold | New threshold |
|---|---|---|
| Annual turnover | £10.2 million | £15 million |
| Balance sheet total | £5.1 million | £7.5 million |
| Number of employees | 50 | 50 (unchanged) |
Because a company’s size is assessed using its filed accounts and usually needs to change for two consecutive years, the practical effect for many contractors will be gradual. If your client’s size is borderline, ask them to confirm whether they are applying the off-payroll rules.
How is IR35 status decided?
There is no single test. HMRC and the courts look at the whole picture of the working relationship, including:
- Control — does the client decide how, when and where you work?
- Substitution — could you genuinely send someone else to do the work?
- Mutuality of obligation — is the client obliged to offer work, and are you obliged to accept it?
- Financial risk — do you bear real business risk, such as fixing defective work at your own cost?
- Part and parcel — are you integrated into the client’s organisation like an employee?
HMRC’s Check Employment Status for Tax (CEST) tool can help, but it is only as good as the answers given and is not the final word.
What if you disagree with the decision?
Clients who issue an SDS must have a status disagreement process. You can challenge the determination, and the client must respond within 45 days, either confirming its decision with reasons or issuing a new SDS.
Your options if you are inside IR35
- Stay with your limited company and receive payments with tax deducted by the fee payer — but you still have company running costs and admin.
- Work through an umbrella company, which employs you, runs PAYE payroll and gives you full employment rights, with no company admin.
- Take a PAYE role directly with the agency or client, where offered.
For many contractors inside IR35, an umbrella company is the simplest option: you get a single payslip, statutory employment rights, pension auto-enrolment and insurance cover — and complete certainty that your tax is being handled correctly.
Need help?
My Pay Day Umbrella provides fully compliant PAYE umbrella payroll for UK contractors and recruitment agencies, with same-day payments and insurance included. Email hello@mypaydayumbrella.com or visit our contact page to get started.
This article is general information, not tax or legal advice. Rules and thresholds can change, so check the latest guidance on GOV.UK or speak to a qualified adviser about your circumstances.
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