IR35 Explained: The Complete Guide for Contractors

IR35 is one of the most significant pieces of tax legislation affecting contractors in the UK. It determines whether you are genuinely self-employed for tax purposes or whether HMRC considers you a "disguised employee" who should be paying the same tax as a permanent member of staff. The financial difference between being inside and outside IR35 can be tens of thousands of pounds per year.

Despite its importance, IR35 remains widely misunderstood. Contractors, agencies, and end clients all struggle with its requirements, and the reforms introduced in recent years have added further complexity. In this comprehensive guide, I will walk you through everything you need to know about IR35 in 2026 — what it is, how it works, who it affects, and what you can do to ensure you are on the right side of the rules.

What Is IR35?

IR35, officially known as the Intermediaries Legislation, was introduced in April 2000. Its purpose is to identify contractors who work through an intermediary (typically a personal service company or PSC) but who would be employees if engaged directly. If a contractor's working arrangement looks like employment in all but name, HMRC wants them to pay employment levels of tax.

The name "IR35" comes from the Inland Revenue press release that announced the legislation. Though the Inland Revenue has long since been replaced by HMRC, the name stuck.

The core principle is straightforward: if you would be an employee of your client if your limited company did not exist, then your engagement falls inside IR35. The tax implications of this are significant, as income received inside IR35 is subject to PAYE income tax, employee and employer National Insurance contributions — substantially reducing your take-home pay.

According to HMRC's own guidance on off-payroll working, the legislation applies to workers who provide services through an intermediary and whose working relationship with the client resembles employment.

How IR35 Status Is Determined

There is no single test that definitively determines IR35 status. Instead, HMRC and the tax tribunals look at the overall picture of a working arrangement, considering several key factors:

Control

Does the client control how, when, and where you do your work? Employees are typically subject to a high degree of control. If your client dictates your working hours, requires you to work at their premises, and directs how tasks are performed, this points towards employment.

Genuinely self-employed contractors have freedom to determine their own working methods, choose their hours, and decide where they work. The more control you have, the stronger your case for being outside IR35.

Substitution

Can you send a substitute to do the work in your place? This is one of the most important tests and also one of the most misunderstood. A genuine right of substitution — where you can send someone else to fulfil the contract without the client's unreasonable refusal — is a strong indicator of self-employment.

For a deep dive into this specific test, read my guide on IR35 and substitution.

Mutuality of Obligation

Is the client obligated to provide you with work, and are you obligated to accept it? In an employment relationship, the employer must provide work and the employee must do it. In a genuine business-to-business arrangement, neither obligation exists — the client offers work, and you choose whether to accept it.

Financial Risk

Do you bear financial risk in the engagement? Employees receive a guaranteed salary regardless of whether their work generates profit. Self-employed contractors risk making a loss, invest in their own equipment, carry professional indemnity insurance, and may not get paid if the work is unsatisfactory.

Part and Parcel of the Organisation

Are you integrated into the client's organisation, or do you operate independently? If you attend staff meetings, use a company email address, are listed on the company intranet, and participate in performance reviews, these factors suggest employment.

The Off-Payroll Working Rules (IR35 Reform)

The original IR35 legislation placed the responsibility for determining status on the contractor's personal service company. In practice, many contractors determined themselves to be outside IR35, and HMRC struggled to enforce compliance.

The off-payroll working reforms shifted this responsibility. Since April 2017 for public sector engagements and April 2021 for medium and large private sector clients, the end client is now responsible for determining whether a contractor falls inside or outside IR35.

This reform, commonly called the "off-payroll rules," means that if you work for a medium or large private sector company or any public sector body, your client must assess your IR35 status using a Status Determination Statement (SDS). If they determine you are inside IR35, the fee-payer (usually the agency) must deduct PAYE tax and National Insurance before paying your PSC.

Small private sector companies are exempt from these rules. If your end client meets the small company criteria (turnover under £10.2 million, balance sheet under £5.1 million, and fewer than 50 employees — meeting two of these three tests), the responsibility for determining IR35 status remains with your PSC.

For more on how the HMRC assessment tool works, see my article on IR35 and the CEST tool.

Financial Impact of IR35

The difference between being inside and outside IR35 is substantial. Outside IR35, a contractor earning £100,000 per year through their PSC can typically take home around £75,000-80,000 through a combination of salary and dividends, after corporation tax and personal tax.

Inside IR35, the same £100,000 gross income yields a take-home of approximately £60,000-65,000 after PAYE income tax, employee NI, and employer NI deductions. That is a difference of £10,000-20,000 per year.

I have prepared a detailed breakdown in my guide on IR35 tax calculations, including worked examples at different income levels.

What Contractors Can Do

If you are a contractor concerned about IR35, there are several practical steps you can take:

Review your working practices. Ensure your actual working arrangements reflect genuine self-employment. Do you have control over how you work? Can you substitute? Are you free from mutuality of obligation? If not, consider renegotiating the terms of your engagement.

Get your contracts right. Your contract should accurately reflect the reality of your working arrangement and include clauses that support an outside IR35 determination. My guide on how to write an IR35-compliant contract covers this in detail.

Use Accounted's IR35 assessment tool. Accounted provides an IR35 assessment tool that helps you evaluate your status based on the key tests. It is not a substitute for professional advice, but it gives you a clear starting point.

Keep evidence. Document instances where you exercised control over your work, declined work, or could have substituted. If HMRC challenges your status, contemporaneous evidence is far more persuasive than after-the-fact assertions.

Seek professional advice. For high-value contracts or ambiguous situations, getting a professional IR35 review from a specialist is money well spent. The cost of a review (typically £200-500) is negligible compared to the tax at stake.

According to IPSE (the Association of Independent Professionals and the Self-Employed), IR35 is the single biggest concern for UK contractors, affecting both their income and their willingness to take on new engagements.

IR35 and Different Working Arrangements

IR35 applies differently depending on your situation:

Contractors working through agencies for large clients — The end client determines your IR35 status, and the agency deducts tax if you are inside IR35.

Contractors working directly for large clients — The client determines status and either deducts tax directly or requires you to account for it through your PSC.

Contractors working for small companies — You determine your own status through your PSC. This is the original IR35 regime.

Sole traders without a PSC — IR35 does not technically apply to sole traders, as there is no intermediary. However, employment status rules still apply, and HMRC can challenge your self-employment status under general employment law.

For information on how IR35 interacts with the Construction Industry Scheme, see my article on IR35 and CIS overlap.

Common Myths About IR35

"If my contract says I am self-employed, I am outside IR35." False. HMRC looks at the reality of the working arrangement, not the words on paper. A contract that says you are self-employed while you work like an employee will not protect you.

"Working from home means I am outside IR35." Not necessarily. While working location is a factor in the control test, it is just one element among many. Working from home during a contract does not automatically place you outside IR35.

"I have been outside IR35 for years, so I must still be." Your IR35 status is assessed per engagement, not globally. A change in client, contract terms, or working practices can change your status.

"IR35 only affects IT contractors." IR35 applies to contractors in every sector, from engineering and construction to management consulting and creative industries.

Looking Ahead

IR35 continues to evolve. There have been ongoing discussions about simplifying the legislation, and the tax tribunals continue to produce case law that refines how the tests are applied. Keeping up to date is essential for any contractor.

For a review of important tribunal decisions and what they mean for contractors, read my guide on IR35 case law decisions.

Managing your IR35 status is just one part of running a successful contracting business. For help with the broader picture — from bookkeeping to self-assessment filing — explore what Accounted can do for contractors and let me handle the numbers while you focus on your work.

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