Part of our complete guide to IR35 & contractor tax.
The basic idea
IR35 exists to stop people working essentially as employees, but billing through their own limited company to pay less tax. If your working arrangement looks enough like genuine self-employment, you're "outside IR35" and keep the usual tax efficiencies of a limited company. If it looks enough like disguised employment, you're "inside IR35", and the engagement gets taxed broadly as if you were on the client's payroll.
Who decides?
For most engagements with medium or large private sector clients, the client decides, not you, and not your agency. They must issue a Status Determination Statement (SDS) explaining their decision and the reasoning behind it. Small private sector clients (below certain size thresholds) and some other arrangements follow different rules, where the determination responsibility can sit with the contractor's own company instead.
Key point: If your client incorrectly determines you're outside IR35 when you should be inside, HMRC can in some circumstances pursue the client for the unpaid tax, not you, this is part of why clients have become more cautious (and sometimes overly cautious) with status determinations since the rules changed.
What actually decides inside vs outside
There's no single factor, HMRC and tribunals look at the whole picture, but the heaviest-weighted factors are usually:
- Control: does the client dictate how, when, and where you do the work, or do you have genuine autonomy over your methods?
- Substitution: could you send a suitably qualified substitute to do the work instead of you personally? A genuine, unfettered right of substitution is a strong indicator of self-employment
- Mutuality of obligation: is the client obliged to keep offering you work, and are you obliged to accept it, the way an employer/employee relationship works?
Financial risk, equipment provision, and whether you work for multiple clients also feed into the overall picture, but rarely decide it alone.
What it costs you in practice
Inside IR35, you lose access to dividends and the tax efficiencies that come with them, income tax and employee-equivalent National Insurance are effectively deducted before you receive the money, much closer to a payslip than a limited company drawing. See our worked inside vs outside IR35 day-rate comparison for exactly what this means in cash terms, and our day-rate calculator to run your own numbers.
Not sure of your status, or disagree with a determination? Book a free consultation, we'll talk through your actual working arrangement and what it means for your tax position.
Frequently asked questions
What does IR35 actually stand for and do?
IR35 is the shorthand for tax legislation that determines whether someone working through their own limited company for a client is, in reality, working like an employee. If "inside IR35", the engagement is taxed broadly like employment, National Insurance and income tax as if on payroll, despite being contracted through a company.
Who decides if I'm inside or outside IR35?
For most medium and large private sector clients, the client itself is responsible for making the determination and must provide a Status Determination Statement. For small private sector clients and some public sector engagements, different rules can apply.
What factors decide inside vs outside status?
Key factors include control (does the client direct how, when and where you work), substitution (could you send someone else to do the work), and mutuality of obligation (is the client obliged to offer work and you obliged to accept it). No single factor decides it alone.
How much difference does inside vs outside IR35 make to take-home pay?
Often substantial, inside IR35 means employment-style tax and National Insurance are deducted before you receive the money, with none of the usual limited company tax efficiencies like dividends. Use a day-rate comparison tool to see the real difference for your rate.