IR35 Explained for UK Contractors in 2026: Inside, Outside and Who Decides

IR35 (the "off-payroll working rules") exists to stop people who work like employees from paying less tax by invoicing through a personal service company. For independent consultants and contractors, getting it wrong can cost thousands.

Who decides your status?

• Medium and large private-sector clients and all public-sector bodies must decide your status and issue a Status Determination Statement (SDS).
• Small private-sector clients: you (via your limited company) are responsible for deciding.

Whether a client is "small" follows Companies Act size tests. Those thresholds were raised recently, so more clients may now count as small — check with your client each year rather than assuming.

The key tests

HMRC and the courts look at the whole picture, but three factors carry the most weight:

1. Control — does the client decide how, when and where you work?
2. Substitution — can you genuinely send a qualified substitute?
3. Mutuality of obligation — is the client obliged to offer work and you obliged to accept it?

Other indicators: financial risk, using your own equipment, multiple clients, and whether you are integrated into the client's organisation.

Inside vs outside: the money

• Outside IR35: your company pays Corporation Tax on profits and you can take a mix of salary and dividends.
• Inside IR35: the fee-payer deducts PAYE and National Insurance, much like employment, and many limited-company advantages disappear.

Protecting yourself

• Get the contract reviewed, and make sure working practices match it
• Keep evidence: multiple clients, your own kit, business insurance, marketing
• Challenge an SDS you disagree with — clients must respond within 45 days
• Use HMRC's CEST tool as a guide, not the final answer

Need help?

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