- Off-payroll working rules
- the formal name for IR35, the rules that decide whether a contractor working through their own company should be taxed as an employee for a given engagement.
- Personal service company, PSC
- the contractor's own limited company through which they provide their services.
- Inside IR35
- the engagement is treated like employment, so Income Tax and National Insurance are deducted at source through PAYE and take-home is lower.
- Outside IR35
- the engagement is genuinely self-employed, paid to the contractor's company, and income can be taken more tax-efficiently.
- Status Determination Statement, SDS
- the written decision a medium or large client, or any public sector body, must give stating your IR35 status and its reasons.
- Small company exemption
- where a small private-sector client is not bound by the off-payroll rules, so the contractor's own company decides the status instead.
Key facts
- Small company thresholds for 2026/27: £15 million turnover, £7.5 million balance sheet, 50 employees on average, meet two of three
- Public sector and medium or large private clients must issue a Status Determination Statement
- For small private-sector clients, the contractor's own PSC decides IR35 status
- Around 14,000 companies become small for 2026/27, moving the decision back to contractors
Your IR35 position drives your take-home. Estimate both sides with the IR35 calculator and the contractor take home calculator, and if you are choosing a structure see limited company vs sole trader guide, or see sole trader tax guide if you trade without a company.
Outside IR35 income is usually a small salary plus dividends through a company, taxed as set out in corporation tax rates guide and the dividend guide.
What Is IR35 and Why Does It Matter?
IR35 (formally the off-payroll working rules) has existed since 2000, but major reforms in 2017 (public sector) and 2021 (private sector) transformed how it works in practice. The rules target what HMRC calls "disguised employment": contractors who work like permanent employees but use a limited company structure to pay lower overall tax.
Before the reforms, contractors determined their own IR35 status. Since April 2021, it is the responsibility of the end client (the company using the contractor's services) to issue a Status Determination Statement (SDS) for each engagement. If the client gets it wrong, the tax liability can fall on the fee-payer in the supply chain, typically the recruitment agency.
The only exception is where a client counts as a small company, and so the off-payroll rules do not apply, if it meets at least two of three conditions, annual turnover not more than £15 million, balance sheet total not more than £7.5 million, and not more than 50 employees on average. Small companies retain the pre-2021 rules, meaning contractors themselves determine their own status.
These thresholds rose from £10.2 million and £5.1 million under the Companies Act, and because off-payroll status looks at the previous financial year, the higher limits reach many engagements only from the 2026/27 tax year. Around 14,000 companies move from medium to small, which hands the IR35 decision back to those contractors and their own companies.
The Three Key IR35 Tests
Status is determined by looking at the actual working relationshiprather than just what the contract says. HMRC and employment tribunals have developed three primary tests, derived from employment law case law spanning decades:
1. Personal Service / Substitution. A genuinely self-employed contractor can send a qualified substitute to do the work in their place without requiring the client's approval. An employee cannot. A genuine, unrestricted right of substitution is one of the strongest indicators of outside IR35 status, but the right must be real, not just a contractual clause that would never be exercised.
2. Control. Who decides how, when, and where the work is done? If the client dictates your working hours, methods, location, and daily priorities, this looks like employment. A contractor who sets their own methods, chooses their working environment, and is results-focused rather than time-focused has a stronger outside IR35 case.
3. Mutuality of Obligation (MOO). In employment, the employer must offer work and the employee must accept it. Genuine contractors work on discrete, time-limited projects with no expectation of further work on either side. If you have been working continuously at the same client for years with automatic renewals, HMRC will examine MOO carefully.
Secondary Factors Also Matter
Beyond the three primary tests, HMRC also considers: whether the contractor bears financial risk (their own equipment, professional indemnity insurance, risk of poor work); whether they are integrated into the client's organisation (company email, team meetings, org chart); and whether they work for multiple clients concurrently. Each factor adds to the overall picture.Inside vs Outside IR35: Real Take-Home Comparison
The financial gap between inside and outside IR35 depends on profit level, expenses, and how income is structured. The table below shows approximate annual take-home pay at three common day rates, assuming 230 working days (46 weeks × 5 days), no significant allowable expenses, and a modest optimal salary structure for outside IR35.
| Day Rate | Annual Gross | Inside IR35 (est.) | Outside IR35 (est.) | Annual Difference |
|---|---|---|---|---|
| £400/day | £92,000 | ~£57,000 | ~£67,000 | ~£10,000 |
| £500/day | £115,000 | ~£70,000 | ~£83,000 | ~£13,000 |
| £600/day | £138,000 | ~£82,000 | ~£100,000 | ~£18,000 |
Approximate figures for England/Wales 2026/27. Inside IR35 applies income tax + employee + employer NI. Outside IR35 assumes optimal salary/dividend split via Ltd company. Use the IR35 Calculator for personalised figures.
At £500/day, the inside vs outside difference is approximately £13,000 per year. Importantly, the advantage narrows at higher income levels as higher-rate dividend tax (35.75%) reduces the outside IR35 benefit. At very high day rates (£800+), the difference can be as low as £5,000 to £8,000 net of corporation tax and dividend tax.
For 2026/27, the 2% increase in dividend tax rates (from 8.75% to 10.75% basic rate, 33.75% to 35.75% higher rate) further narrows this gap. However, operating outside IR35 via a limited company remains significantly more tax-efficient for the vast majority of contractors.
IR35 Calculator - Inside vs Outside Comparison
Enter your day rate, working days, and IR35 status to get your exact inside vs outside take-home, with a full breakdown of income tax, NI, corporation tax, and dividends.
The CEST Tool and Its Limitations
HMRC's free Check Employment Status for Tax (CEST) tool is the official online questionnaire for assessing IR35 status. It produces one of three results: Inside IR35, Outside IR35, or "Undetermined". HMRC stands behind CEST outcomes provided the information entered is accurate.
However, CEST has well-documented limitations. Most critically, the tool does not adequately assess Mutuality of Obligation, arguably one of the most important tests. It also does not ask about several factors that employment tribunals have considered relevant, such as the degree of financial risk borne by the contractor. Employment law specialists consistently recommend professional legal review of any borderline contract rather than relying solely on CEST.
CEST Outcomes Are Not Binding on Contractors
A client can issue an SDS saying you are outside IR35 based on CEST, but HMRC can still challenge this determination. If challenged, HMRC will look at the actual working arrangement. Ensure your day-to-day work practices match your contract terms. Otherwise, an inside IR35 determination with backdated tax could follow.How to Structure Contracts to Stay Outside IR35
Avoiding inside IR35 status requires both the right contractual language and the right working practice:
Right of substitution: Include a genuine substitution clause and, ideally, have exercised it at least once. If the contract allows substitution but the client would always reject a substitute in practice, the clause provides weak protection.
Project-based scope: Contracts should describe specific deliverables rather than a general "resource" provision. Defining clear milestones and outputs reinforces business-to-business rather than employer to employee framing.
Avoid employee-like behaviours: Do not accept a company email address, business cards, or a fixed desk if you can avoid it. Attendance at company social events and team meetings as a regular participant can be cited as integration into the organisation.
Work for multiple clients: Where possible, take on concurrent projects with different clients. A sole-client contractor working full-time, continuously, for three years looks very much like a disguised employee.
Private Sector IR35 Rules Since April 2021
From April 2021, the responsibility for determining IR35 status in the private sector shifted from contractors to end clients. This mirrored the public sector rules introduced in April 2017. The key changes were:
Status Determination Statements (SDS): End clients must issue a written SDS for each engagement, stating their determination and the reasons for it. The SDS must be passed down the supply chain to the fee-payer (often an agency) and to the contractor.
Disagreement process: Contractors can dispute an SDS determination directly with the end client. The client has 45 days to respond. If you believe you have been incorrectly placed inside IR35, use this process before seeking legal advice.
Fee-payer liability: If the end client makes an incorrect determination, the tax liability falls on the fee-payer, usually the agency. This creates strong incentives for agencies to be conservative (defaulting to inside IR35). Understanding your rights under the dispute process is therefore especially important.
See Also: Corporation Tax Guide
Use the IR35 Calculator to model your precise take-home pay inside and outside IR35 at your actual day rate, then review the corporation tax rates guide to understand how profits are taxed when operating outside IR35 via a limited company. Understanding your National Insurance position is also critical. Employer NI at 15% above £5,000 is a major additional cost inside IR35 that does not apply outside.Related Calculators
Frequently Asked Questions
IR35 is UK tax legislation (officially called the off-payroll working rules) that determines whether a contractor should be taxed as an employee. If HMRC considers you would be an employee if engaged directly (rather than through a limited company), you are 'inside IR35' and pay employment-level income tax and National Insurance.
A contractor earning £500 per day (approximately £120,000 annually) takes home roughly £80,000-£85,000 outside IR35 via a limited company with an optimal salary/dividend split. Inside IR35, the same contractor takes home approximately £68,000-£72,000 after deemed employment taxes. The gap narrowed in 2026/27 due to the 2% dividend tax increase.
Since April 2021, the end client (not the contractor) determines IR35 status for medium and large private sector organisations. Small companies (below the Companies Act small company threshold) and genuine sole traders remain responsible for their own status determination.
The three key tests are: (1) Substitution, can you send someone else to do the work? (2) Mutuality of Obligation, is the client obliged to offer work and are you obliged to accept it? (3) Control, does the client dictate how, when, and where you work? Genuine self-employment typically shows a right of substitution, no ongoing obligation, and contractor control over working methods.
If your private-sector client is a small company, the off-payroll rules do not apply and your own company decides your IR35 status, as it did before 2021. You then carry the responsibility and the risk if HMRC disagrees, so keep clear evidence of your working practices.
The small-company thresholds rose to £15 million turnover and £7.5 million balance sheet, with the 50-employee limit unchanged, and a client that meets two of the three is small. Because size is judged on the prior financial year, around 14,000 firms become small for 2026/27, moving the IR35 decision back to contractors working for them.
A Status Determination Statement, or SDS, is the written decision a public sector body or a medium or large private client must give you, stating whether you are inside or outside IR35 and why. If you dispute it and the client does not respond within 45 days, the tax liability can pass up the chain to the client.
The real day-to-day working practice decides. HMRC treats the contract as a starting point, but if practice contradicts it, for example a right of substitution that the client would never allow, the contract carries little weight. Make sure your actual working arrangements reflect a genuine business-to-business relationship.
Get UK finance tips delivered weekly
No spam. Unsubscribe any time.
You Might Also Like
Corporation Tax Rates 2026/27: The Complete Guide to Marginal Relief and Small Profits
UK corporation tax 2026/27: 19% on profits up to £50,000, 25% above £250,000, with marginal relief between. Guide for limited company directors.
National Insurance Rates and Thresholds 2026/27: Employee, Employer, and Self-Employed
UK National Insurance rates 2026/27: Class 1 employee 8%/2%, employer 15%, Class 2 and Class 4 for self-employed. Thresholds and worked examples.
James Hartley is a Chartered Management Accountant (CIMA) with more than eight years of experience in UK tax, payroll and compliance. He holds a BSc in Finance and Economics from the University of Manchester and spent his early career at a Big 4 accounting firm. He founded WhatsUK to build free UK financial calculators and guides verified against official HMRC sources. He authors every calculator and article on WhatsUK.
Sources & Official References
- HMRC IR35 - Off-Payroll Working Rules- Official IR35 guidance including CEST tool
- HMRC Check Employment Status for Tax (CEST)- HMRC's online determination tool
- HMRC Off-Payroll Working for Intermediaries- Private sector rules from April 2021
Last verified:
Disclaimer: This calculator provides estimates based on standard HMRC rates for 2026/27. Results may vary based on individual circumstances. This is not financial advice. Always consult a qualified accountant or CIMA-qualified financial adviser for personal tax matters.