PaychecklyIR35 Explained
IR35 is the single biggest factor in a UK contractor's take-home pay. Get it wrong and you can lose a quarter of your income — or face a tax bill years later. Here's what inside and outside IR35 actually mean, who decides, and what it costs.
What IR35 is, in one sentence
IR35 is HMRC's rule for spotting "disguised employment" — people who work through their own limited company but, in practice, behave exactly like an employee of their client. If that's you, IR35 says you should be taxed like an employee, not like a business.
Outside IR35 = you're a genuine business. You can pay yourself a small salary plus dividends through your limited company, which is more tax-efficient.
The take-home difference
This is why IR35 matters so much. On the same day rate, the difference between inside and outside can be enormous:
Outside IR35
Small salary + dividends through your limited company. No Employer's NI on dividends, lower dividend tax rates, and you can retain profit in the company. Typical net: 70–80% of billings (after Corporation Tax and accountancy).
Inside IR35
Taxed as employment income, usually via an umbrella company. Employer's NI (15%) and the umbrella margin come out first, then PAYE. Typical net: 55–65% of billings.
On a £500/day contract (~£115,000/year of billings), the gap between inside and outside IR35 is commonly £12,000–£20,000 a year in take-home. That's the same work, the same rate — just a different tax status.
Who decides your IR35 status?
This changed significantly with the 2021 "off-payroll" reforms, and it depends on your client:
| Your client | Who decides status | Who's liable if wrong |
|---|---|---|
| Medium or large private company | The client | Usually the fee-payer (agency or client) |
| Public sector body | The client | The fee-payer |
| Small private company* | You (your limited company) | You |
*A "small" company meets at least two of: turnover ≤£10.2m, balance sheet ≤£5.1m, ≤50 employees. If you contract for a small company, the old rules still apply and you assess your own status.
The three tests HMRC uses
Whether you're inside or outside comes down to how the working relationship actually operates — not what the contract says on paper. The three big factors:
- Control: Does the client control how, when and where you work, like a boss? Or do you decide how to deliver the work? More client control points toward inside IR35.
- Substitution: Could you send a qualified substitute to do the work in your place? A genuine right of substitution is a strong indicator of being outside IR35 — employees can't send a stand-in.
- Mutuality of obligation (MOO): Is the client obliged to offer you work, and are you obliged to accept it? Ongoing obligation looks like employment; a defined project with no expectation of more work looks like a business engagement.
How to check and protect your status
- Use HMRC's CEST tool (Check Employment Status for Tax) on gov.uk for an indicative result — though it's not infallible.
- Get a contract review from an IR35 specialist before signing. They'll check both the written contract and your actual working practices.
- Consider IR35 insurance if you operate outside — it covers the cost of defending an HMRC enquiry and any resulting liability.
- Keep evidence — a right-of-substitution clause that's genuinely allowed, your own equipment, multiple clients, and a business-like setup all help.
Should you go inside, outside, or permanent?
If a role is genuinely inside IR35, the tax efficiency of a limited company largely disappears — and an inside-IR35 day rate needs to be roughly 20–30% higher than a permanent salary just to match the take-home, with none of the employee benefits. Many contractors now negotiate a higher rate for inside roles, or weigh up whether a permanent position with pension, holiday and sick pay is actually better value.
To compare an inside-IR35 day rate against a permanent salary, work out the annual equivalent and run it through the take-home calculator, then compare with our dividends for directors guide for the outside-IR35 route.
Compare contract rates and salaries ›General information about IR35 for the 2026/27 tax year, not tax or legal advice. IR35 status is fact-specific and the consequences of getting it wrong are serious — always take professional advice from an IR35 specialist or contractor accountant before deciding how to operate.