IR35 and Off-Payroll Working Explained: Inside vs Outside
Last updated 12 June 2026
IR35 — the off-payroll working rules — stops contractors who work like employees but bill through their own limited company (a personal service company) from paying less tax than an employee would. If a contract is inside IR35, you are treated as an employee for tax: the fee-payer deducts Income Tax and 8% employee National Insurance through PAYE before paying your company. If it is outside IR35, your company is paid gross and you can take a tax-efficient salary-plus-dividends mix. Since 6 April 2021, medium and large clients — not you — decide your status.
- Inside IR35 = employed for tax: the deemed employer deducts Income Tax (20%/40%/45%) and employee Class 1 NI (8%, then 2% above £50,270) from your fees in 2026/27.
- Outside IR35 = paid gross: profits bear Corporation Tax (19% up to £50,000 profit, 25% above £250,000) and dividends are taxed at 10.75% / 35.75% / 39.35% — the lower two rates rose 2 percentage points this year.
- Public sector clients (since 6 April 2017) and medium/large private sector clients (since 6 April 2021) decide your status and must issue a Status Determination Statement (SDS) with reasons.
- If your client is "small" — meeting no more than one of: turnover over £10.2 million, balance sheet over £5.1 million, more than 50 employees — your own company decides status instead.
- Status turns on case-law tests: right of substitution, control, and mutuality of obligation — not job titles.
- You can dispute an SDS at any time until the final payment; the client must respond within 45 days.
- From 6 April 2026, agencies (or the end client if no agency) are jointly liable for PAYE where an umbrella company employs the worker.
What is IR35 (the off-payroll working rules)?
IR35 is anti-avoidance tax legislation aimed at "disguised employment": people supplying services through their own intermediary — usually a limited company known as a personal service company (PSC), though it can be a partnership or another individual — who would count as an employee if engaged directly. If the rules bite, the engagement is taxed like employment, removing the tax advantage of the company structure.
The rules do not apply to sole traders invoicing in their own name — they have separate status tests, and our sole trader tax calculator covers that world.
What is the difference between inside and outside IR35?
"Inside IR35" means the engagement is, in substance, employment — so employment taxes are due. "Outside IR35" means you are genuinely in business on your own account, and your company controls how profits are extracted:
| Inside IR35 | Outside IR35 | |
|---|---|---|
| Who is paid | Your company, after tax is deducted at source | Your company, gross |
| Income Tax | PAYE at 20% / 40% / 45% (2026/27, rest of UK) | Corporation Tax on profits, then dividend tax (10.75% / 35.75% / 39.35%) and/or PAYE on salary |
| National Insurance | Employee Class 1 at 8% (£12,570–£50,270), 2% above; deemed employer owes 15% employer NI plus any 0.5% Apprenticeship Levy | NI only on salary; dividends carry no NI |
| Planning | Very limited — taxed like a salary | Deduct business costs, make pension contributions, time dividends across tax years |
The salary-and-dividends route is why outside-IR35 contracting is more tax-efficient — though the gap narrowed in 2026/27, when the basic and higher dividend rates rose from 8.75% and 33.75% to 10.75% and 35.75%, with the allowance still just £500. Full numbers in our dividend tax guide.
Who decides your IR35 status in 2026/27?
It depends on the client, not on you. Since 6 April 2017 in the public sector, and 6 April 2021 for medium and large private and voluntary sector organisations, the client must determine your status, taking reasonable care, and give you a Status Determination Statement (SDS) with the conclusion and reasons. Only when the client is "small" does responsibility stay with your intermediary.
| Your client | Who decides status | Who deducts the tax if inside |
|---|---|---|
| Public sector body (any size) | The client (since 6 April 2017) | The fee-payer (client or agency) |
| Medium or large private/voluntary sector organisation | The client (since 6 April 2021) | The fee-payer (client or agency) |
| Small private sector company | Your own intermediary (you) | Your own company, under the original IR35 rules |
| Client based wholly overseas | Your own intermediary (you) | Your own company |
A private sector company counts as medium or large where it meets at least two of these conditions for two consecutive financial years: turnover over £10.2 million, balance sheet total over £5.1 million, or more than 50 employees. (The Companies Act thresholds rose to £15 million and £7.5 million for financial years beginning on or after 6 April 2025, but HMRC confirms the earliest tax year that can affect off-payroll status is 2027/28 — the £10.2m/£5.1m tests still govern 2026/27.)
You can challenge an SDS at any point until the last payment under the contract, and the client must respond within 45 days — miss that deadline and responsibility for the tax shifts to the client. HMRC's Check Employment Status for Tax (CEST) tool can test a determination, but the underlying tests come from case law: a genuine right to send a substitute, how much control the client has over how, when and where you work, and mutuality of obligation, alongside financial risk and integration into the client's organisation.
How much does inside IR35 cost you in take-home pay?
Inside IR35, fees are taxed like salary, so the deductions are easy to estimate. A contractor with £60,000 of inside-IR35 fees in 2026/27 (rest of UK, standard tax code, no pension) has £11,432 of Income Tax and £3,211 of employee National Insurance deducted, keeping £45,357 — roughly 76p in the pound.
| £60,000 deemed employment income, 2026/27 | Calculation | Amount |
|---|---|---|
| Income Tax | 0% on £12,570; 20% on £37,700; 40% on £9,730 | £11,432 |
| Employee Class 1 NI | 8% on £37,700 (£12,570–£50,270) + 2% on £9,730 | £3,211 |
| Take-home | — | £45,357 |
Two hidden costs widen the real gap. First, the deemed employer also owes 15% employer National Insurance (above a £5,000 secondary threshold in 2026/27) plus any Apprenticeship Levy — usually priced into a lower assignment rate, so it comes out of your pocket indirectly. Second, you lose the outside-IR35 planning levers: retained profit taxed at 19% Corporation Tax up to £50,000 (25% above £250,000, marginal relief between) and dividends timed across tax years. See our 2026/27 tax bands guide and National Insurance classes guide for the mechanics.
What about umbrella companies?
If you are employed by an umbrella company, the off-payroll rules are unlikely to apply — you are already on a payroll with PAYE and NI deducted as an employee. One important change: from 6 April 2026, the recruitment agency (or the end client, where there is no agency) is jointly and severally liable for PAYE in supply chains using umbrella companies, so HMRC can recover unpaid payroll tax from the agency if a non-compliant umbrella fails to hand it over. If an umbrella's take-home offer looks too good, it is.
Whichever side of the line you sit on, run your own numbers with our free UK tax calculators before accepting a rate.
Frequently asked questions
What does inside IR35 mean?
Inside IR35 means HMRC treats the engagement as employment for tax. The fee-payer deducts Income Tax and employee National Insurance through PAYE before paying your limited company, and pays 15% employer NI on top — employee-style taxation without employment rights such as holiday or sick pay.
What does outside IR35 mean?
Outside IR35 means you are genuinely in business on your own account. Your company is paid gross, pays Corporation Tax on profits (19% up to £50,000 of profit in 2026/27), and you extract income as you choose — typically a small salary plus dividends taxed at 10.75%, 35.75% or 39.35% with a £500 allowance.
Who decides whether I am inside or outside IR35?
Public sector and medium or large private sector clients decide, and must issue a Status Determination Statement with reasons. Only if the client is small (meeting no more than one of: turnover over £10.2m, balance sheet over £5.1m, more than 50 employees) does the decision stay with your own company.
Can I challenge an inside-IR35 determination?
Yes. You can make representations against an SDS at any time until the last payment under the contract. The client must respond within 45 days; if it fails to, responsibility for deducting and paying the tax transfers to the client.
Does IR35 apply to sole traders?
No. The off-payroll working rules only apply where services are supplied through an intermediary, usually a personal service company. Sole traders invoicing in their own name are outside IR35's scope, though clients must still consider general employment-status rules when engaging them.
Is working through an umbrella company inside IR35?
The off-payroll rules are unlikely to apply, because the umbrella employs you directly and operates PAYE like any employer. From 6 April 2026, agencies (or the end client if there is no agency) are jointly liable for PAYE in umbrella supply chains, targeting non-compliant umbrella schemes.
Sources: Understanding off-payroll working (IR35) (gov.uk), Off-payroll working for clients (gov.uk), Rates and thresholds for employers 2026 to 2027 (gov.uk), HMRC ESM10006a — increased size thresholds (gov.uk), Corporation Tax rates (gov.uk) and PAYE rules for umbrella company supply chains from 6 April 2026 (gov.uk), verified 12 June 2026. Estimates for information only — not regulated tax advice.