Understand how IR35 works, whether it applies to you, and how to structure your contracts and working practices to stay compliant and keep more of your income.
The legislation was introduced in 2000 to tackle “disguised employment” — arrangements where an individual worked exclusively for one client in a role indistinguishable from a permanent employee but paid significantly less tax by routing income through a personal service company (PSC).
IR35 matters because the tax difference between being inside and outside is substantial. For a contractor billing £75,000, operating outside IR35 through a limited company typically saves £5,000–£10,000 per year compared to being taxed as an employee. Use our Ltd vs PAYE tax calculator to see the exact difference for your income.
This guide covers the current IR35 rules for 2026/27, including the off-payroll working reforms that shifted status determination responsibility to medium and large clients from April 2021. For a broader view of contractor accounting, see our contractor accountant UK hub.
Here is a side-by-side comparison for a contractor billing £80,000 in 2026/27:
| Outside IR35 (Ltd) | Inside IR35 | |
|---|---|---|
| Gross income | £80,000 | £80,000 |
| Corporation tax (19%) | £14,250 | N/A |
| Salary (optimal £12,570) | £12,570 | £80,000 (deemed) |
| Employee NI (8%) | £606 | £5,394 |
| Employer NI (15%) | £1,136 | £11,250 |
| Income tax | £4,908 (on dividends) | £15,432 |
| Approximate take-home | £59,200 | £52,400 |
| Annual cost of being inside IR35 | £6,800 | |
The figures assume £5,000 in allowable expenses (outside IR35 only) and use the 2026/27 dividend tax rates and income tax thresholds. At higher billing rates the gap widens further — a contractor on £120,000 can lose over £12,000 per year inside IR35.
HMRC and the tax tribunals assess IR35 status using three primary tests. All three must be considered together — no single test is decisive on its own. If the overall picture points towards employment, the contract is inside IR35.
Can you send a suitably qualified substitute to do the work in your place? If you have a genuine, unfettered right to send someone else — and the client cannot refuse without good reason — this strongly indicates self-employment. If the client expects you personally and would reject a substitute, it looks like employment.
Key evidence: a substitution clause in your contract that has actually been exercised or is genuinely available, not just theoretical wording that has never been tested.
Points outside IR35 if genuineDoes the client control how you do the work, when you do it, and where you do it? An employee is told what to do and how to do it. A genuine contractor is engaged for their expertise and given freedom over method, hours and location. Being required to attend specific meetings or follow security protocols does not automatically equal control — what matters is the degree of direction over the work itself.
Key evidence: you set your own working hours, choose your own tools and methods, and the client specifies the deliverable (the “what”) rather than the process (the “how”).
Points outside IR35 if contractor controls methodIs the client obliged to offer you work, and are you obliged to accept it? In an employment relationship, the employer must provide work and pay for it, and the employee must make themselves available. If your contract is for a defined project or deliverable with no obligation on either side beyond that scope, this points towards self-employment.
Key evidence: project-based contracts with defined deliverables and end dates, the ability to turn down work without consequence, no guaranteed hours or retainer between projects.
Points outside IR35 if no ongoing obligationBeyond these three primary tests, tribunals also consider factors like financial risk (do you bear the cost if the work needs redoing?), whether you provide your own equipment, whether you work for multiple clients, and how integrated you are into the client’s organisation. A specialist IT contractor accountant assesses the full picture — not just the contract wording.
Under the off-payroll working rules, the process works as follows:
Clients must take “reasonable care” in making their determination. Blanket assessments — where a client declares all contractors inside IR35 without individual review — do not meet this standard. If a client applies a blanket ruling, the contractor has grounds to challenge and HMRC may transfer the tax liability to the client rather than the contractor.
In practice, many large organisations have adopted overly cautious positions, pushing contractors inside IR35 to avoid risk. This is why independent, evidence-based contract and working-practice reviews matter — they give you the documentation to challenge unfair determinations.
Key limitations of CEST:
Our recommendation: use CEST as a first pass but do not rely on it as your sole IR35 assessment. A professional review of your contracts and actual working practices gives you a defensible, evidence-based position if HMRC investigates.
Demonstrating that you are genuinely in business on your own account — not a disguised employee — requires both the right contract terms and consistent working practices that match them.
HMRC does not just read your contract — they look at how you actually work. If your contract says you can substitute but you have never done so and the client would clearly refuse, that clause carries little weight. The strongest IR35 defence is alignment between what the contract says and what happens day to day. This is exactly what a specialist contractor accountant reviews with you.
HMRC has increased its focus on IR35 compliance since the off-payroll reforms. Investigations typically begin with a review of the Status Determination Statement and then progress to examining actual working practices — interviewing both the contractor and the client.
For a comprehensive guide on what being inside IR35 costs, your four options (challenge, stay Ltd, move to umbrella, negotiate a rate uplift), and which expenses remain claimable, see our inside IR35 options guide.
If HMRC concludes that a contract is inside IR35, they can recover the tax and NI that should have been deducted, plus interest and penalties. The liability falls on the fee-payer (the entity that should have made the deduction) under the off-payroll rules, unless the client failed to take “reasonable care” — in which case the liability transfers to the client.
Separately, if you were involved in historic loan-based remuneration schemes that HMRC deemed to be disguised employment, the loan charge may still apply. Our detailed guide covers what you need to know about HMRC loan schemes and the loan charge in 2026.
ICAEW-regulated and led by Godwin Pinto ACA, AccTek provides specialist IR35 support for UK contractors as part of our contractor accountant service:
Whether you are an IT contractor, a freelance consultant, or a CIS contractor dealing with employment status questions, we have the expertise to help you navigate IR35 with confidence.
Does IR35 apply to sole traders?
IR35 specifically targets contractors working through an intermediary, usually a personal service company (limited company). Sole traders are not typically caught by IR35 because they have no intermediary. However, HMRC can still challenge a sole trader’s employment status under separate employment status rules if the arrangement resembles employment.
Who decides my IR35 status?
For medium and large private-sector clients, the end client is responsible for determining your IR35 status under the off-payroll working rules (in force since April 2021). For small private-sector clients — broadly those with under 50 employees, under £10.2m turnover, or under £5.1m on the balance sheet — the contractor makes their own assessment.
What happens if my client gives me an inside-IR35 determination?
You have the legal right to challenge it. The client must respond within 45 days with a revised determination or a written confirmation of the original with reasons. A specialist IR35 accountant can help you draft the challenge with evidence from your actual working practices. If the determination stands and you continue the engagement, the fee-payer deducts income tax and NI before paying your company.
Can I still use my limited company if I am inside IR35?
Yes, you can still invoice through your limited company, but the tax advantages are largely eliminated. The fee-payer deducts income tax and employee NI at source, and pays employer NI on top. Your company receives a net payment after these deductions. Some contractors in this position consider moving to an umbrella company to reduce admin, since the tax outcome is similar. See our full umbrella vs limited company comparison for the numbers. See our guide on contractor accounting structures for a full comparison.
How much does an IR35 contract review cost?
AccTek includes IR35 contract reviews as part of our contractor accounting packages, which start from £19.99 per month. There is no separate charge for the review. For a personalised quote, visit our instant quote page.
Is the CEST tool reliable?
CEST provides a useful starting point but has well-documented limitations. It returns “indeterminate” in a significant proportion of cases and under-weights the substitution clause, which is one of the strongest indicators of self-employment in case law. We recommend using CEST as a first pass and following it with a professional contract and working-practice review for a defensible position.
What records should I keep for IR35 purposes?
Keep copies of all contracts, Status Determination Statements, any correspondence about substitution, evidence of multiple clients (or marketing activity), proof of your own equipment, professional indemnity insurance certificates, and invoices showing project-based or deliverable-based billing. An IT contractor accountant can advise on exactly what to document for your specific engagement.
Contract reviews, working-practice assessments and ongoing compliance — all included in your fixed monthly fee.
