What is IR35? The Complete 2026 Guide

IR35 is the informal name for the UK's off-payroll working rules. In practice, it is the set of tax laws that determine whether a contractor working through a personal service company (PSC) - typically a limited company - should be taxed as an employee of the end client rather than as a self-employed individual.

If you fall inside IR35 on a given engagement, the income from that contract is treated as “deemed employment income”: you pay income tax and National Insurance as if you were an employee, but without the employment rights that come with that status. You get the tax burden of employment with none of the protections.

Why IR35 was introduced

The rules originate from Inland Revenue press release IR35, published in March 2000. At the time, HMRC was concerned that a significant number of workers were setting up PSCs specifically to be taxed more efficiently - taking a low salary from their company and extracting the rest as dividends, which attract lower rates of National Insurance. The government viewed this as a form of tax avoidance by workers who, in substance, were employees of the clients they served.

The resulting legislation, now found in Chapter 8 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), created an obligation for a PSC to calculate and pay a “deemed employment payment” where the contractor's relationship with their client would be one of employment if the intermediary company were stripped away.

Who IR35 affects

IR35 applies to contractors who:

• Provide services to a client through their own limited company (PSC)
• Would be considered an employee of that client if they were engaged directly
• Work in the private sector for a medium or large business, or in the public sector

It is sector-neutral: IT contractors, management consultants, locum doctors, engineers, journalists, and any other professional working through a PSC can be caught if the underlying relationship resembles employment. However, in practice, sectors with skilled contract workforces - particularly technology, financial services, and professional services - see the highest volumes of IR35 cases.

The April 2021 reform: who determines IR35 status

For most of its history, the IR35 rules placed the obligation on the contractor's PSC to assess its own status and pay any resulting tax. This proved difficult to enforce. In April 2017, Chapter 10 of ITEPA 2003 introduced a new regime for the public sector: medium and large public sector organisations became responsible for determining the IR35 status of contractors they engaged, issuing a Status Determination Statement (SDS), and deducting PAYE tax and NI at source.

Following consultation, a similar reform was extended to the private sector from 6 April 2021. Since then, medium and large private sector businesses that engage contractors through PSCs are responsible for:

• Carrying out a reasonable assessment of the contractor's IR35 status
• Issuing a Status Determination Statement to the worker and any agency in the chain
• Ensuring the fee-payer deducts PAYE and NI from payments to inside-IR35 contractors
• Operating a disputes resolution process if the contractor disagrees with the determination

Where the end client is a small company (as defined by the Companies Act 2006), responsibility reverts to the contractor's PSC - as under the original Chapter 8 rules.

The April 2026 threshold changes

The new small company thresholds (two of three must be satisfied) are:

• Annual turnover not exceeding £15 million (previously £10.2 million)
• Balance sheet total not exceeding £7.5 million (previously £5.1 million)
• No more than 50 employees (unchanged)

If your current client has reclassified as small, you should request confirmation and - if you believe you are outside IR35 - document a thorough self-assessment. The responsibility now sits with your PSC, and HMRC can investigate if they have cause to.

The key employment status tests

There is no single statutory test for IR35. Instead, courts and tribunals apply the employment status principles developed over decades of case law, asking whether - if the intermediary company were absent - there would be a contract of service (employment) between the worker and the client.

The main tests are:

• Mutuality of obligation (MOO):Is there an obligation on the client to offer work and on the worker to accept it? Following the Supreme Court's ruling in PGMOL v HMRC [2024], courts now distinguish between the basic MOO (an obligation to perform the agreed services) and enhanced MOO (a broader expectation of ongoing engagement).
• Control:Does the client control how, when, and where the work is done? The greater the client's control over the worker's methods, hours, and location, the more employment-like the arrangement.
• Substitution: Can the contractor send a substitute in their place? A genuine, unfettered right to substitute is strong evidence of self-employment. Post Atholl House v HMRC [2022], even a contractual right to substitute that has never been exercised can be significant - as long as the right is real, not merely a drafting device.
• Business on own account (BOOA):Does the contractor's overall picture look like that of a genuine independent business? Factors include multiple clients, financial risk, provision of own equipment, professional indemnity insurance, and branding.

Secondary factors - such as whether the contractor appears on the client's staff directory, uses a client email address, or is entitled to employee benefits - also inform the overall picture, but they are less decisive than the primary tests.

Consequences of being inside IR35

If an engagement is inside IR35, the financial consequences are significant. Under the off-payroll rules (Chapter 10), the fee-payer - typically an agency or the end client where no agency is involved - deducts income tax and employee NI from the payment to the PSC, and pays employer NI on top. This employer NI (13.8% on earnings above the secondary threshold) effectively reduces the contractor's available income without any of the employment rights - holiday pay, sick pay, pension contributions, or redundancy rights - that a genuine employee would receive.

For small company engagements (Chapter 8), the PSC itself calculates a deemed employment payment and pays the PAYE and NI through its own payroll, with no 5% expenses deduction available from April 2024 onward.

How to assess your IR35 status

Every engagement should be assessed individually, both at the outset and periodically if the working arrangements change. A proper assessment looks at:

• The written contract - does it accurately reflect the working relationship?
• The actual day-to-day working practices - what actually happens in practice?
• Whether the primary tests (MOO, control, substitution, BOOA) point toward employment or self-employment
• Any secondary factors that tip the balance

HMRC's own CEST tool has been widely criticised for failing to properly assess MOO and for not incorporating recent case law - including PGMOL. A thorough, reasoned assessment will always outperform a tick-box tool when it comes to understanding your real position.