IR35 is the off-payroll working rules, the HMRC regime that decides whether you pay tax like an employee or like a business when you contract through your own limited company. IR35 affects you when you supply services through a personal service company and the engagement would have counted as employment had the client hired you directly (from GOV.UK, verified 19 Sep 2026). This beginner’s guide explains IR35 from scratch, then gives you a self-check list of the engagement facts that decide your status.
What Is IR35 in Simple Terms?
In simple terms, IR35 is the off-payroll working rules: HMRC’s regime that makes a worker who provides services through their own intermediary pay broadly the same Income Tax and National Insurance as an employee would (from GOV.UK, verified 19 Sep 2026).
The intermediary is usually a personal service company (PSC): a limited company the contractor owns, works through and invoices from. The formal name, off-payroll working, carries the meaning: the worker sits off the client’s payroll yet, in HMRC’s view, works in a way that resembles employment. The rules bite where engaging that worker directly would have counted as employment.
The name IR35 comes from the press-release number of the 1999 measure that created it. HMRC has kept the label ever since.
The rules apply on a contract-by-contract basis. A contract for this purpose is a written, verbal or implied agreement. One engagement can sit inside the rules while a second engagement, even for the same client, sits outside.
An engagement the rules catch is inside IR35. An engagement they do not catch is outside IR35. Working through an umbrella company removes the question altogether, because the umbrella employs the worker directly and operates PAYE.
Who Does IR35 Apply To?
IR35 applies to a worker who supplies services to a client through their own intermediary, most often a personal service company (from GOV.UK, verified 19 Sep 2026).
Each engagement involves four parties:
- The worker: the contractor, freelancer or consultant supplying skills through a PSC.
- The client: the business or organisation receiving the services.
- The intermediary: the PSC itself, the company sitting in the middle of the chain.
- The fee-payer: the party that pays the PSC, often a recruitment agency.
The rules commonly reach IT contractors, engineers, locum and medical professionals, project managers and consultants on extended single-client engagements. Three groups sit outside the regime’s reach (from GOV.UK, verified 19 Sep 2026): employees on PAYE, umbrella company employees, and sole traders invoicing directly with no intermediary. Sole traders are instead assessed under ordinary employment status rules, a regime covered by our self-employed and sole trader accounts service.
The client’s size decides who determines status: a medium or large client meets 2 or more of the 3 thresholds of £10.2m annual turnover, £5.1m balance sheet total and 50 employees. When the client holds that duty, it must issue a Status Determination Statement (SDS) giving its conclusion and reasons.
What Happens If IR35 Applies to You?
If IR35 applies, the fee-payer, as deemed employer, deducts Income Tax and employee National Insurance from payments to your company and pays employer National Insurance and the Apprenticeship Levy where due (from GOV.UK, verified 19 Sep 2026). Your take-home pay falls toward employment levels. Deemed employers do not deduct student or postgraduate loan repayments; you report those through Self Assessment.
The table below sets the two outcomes side by side against 4 facts of payment and filing.
| Fact of the engagement | Inside IR35 | Outside IR35 |
|---|---|---|
| Tax deducted before payment | Yes: Income Tax and employee NI, by the fee-payer | No: fees arrive gross in the company |
| Employer NI and Apprenticeship Levy | Paid by the fee-payer where due | Not due on the engagement |
| Take-home pattern | Employment levels | Salary plus dividends |
| Company filings | Annual accounts, Corporation Tax, PAYE | Annual accounts, Corporation Tax, PAYE |
If IR35 does not apply, fees arrive gross in your company. The company pays Corporation Tax at 19% on profits up to £50,000 and 25% on profits above £250,000. You draw income as salary plus dividends. Dividends above the £500 allowance are taxed at 10.75%, 35.75% and 39.35% for 2026-27, and dividends carry no National Insurance, which is why outside status pays more.
The company keeps its filings under either status: annual accounts, Corporation Tax returns and PAYE. These contractor tax rules change how money reaches you, not what your company must file. Our bookkeeping services keep those records in order whichever way a determination lands.
How Do You Check Where You Stand?
You check where you stand with an employment status check: a test of the facts of your engagement against the markers employment law uses. Status turns on three core markers: control, substitution and mutuality of obligation. The six-fact list below widens the check, because payment terms, financial risk and integration carry weight too.
Work through each fact before you sign:
- Control: identify who decides what work is done, when, where and how. Client control across all four points points inside.
- Substitution: confirm whether you can send a substitute in your place. Genuine, unfettered substitution points outside.
- Mutuality: test whether the client must offer you work and you must accept it. Obligations on both sides point inside.
- Financial risk: examine whether you can profit or lose money on the engagement, carry your own insurance and supply your own equipment. Financial risk points outside.
- Payment: compare how you are paid. A fixed hourly rate like staff pay points inside; a price per deliverable points outside.
- Integration: measure how long the engagement has run and how embedded you are. A long, single-client engagement points inside.
CEST, HMRC’s Check Employment Status for Tax tool, produces an indicative determination from your answers. A professional contract review goes further and checks both the written terms and the real working practices, which must match. Keep the evidence as you go: contracts, variations, timesheets and emails record the real picture. Our contractor accountants in Newcastle run those reviews for contractors across the North East.
Getting status wrong is expensive for whichever party holds the liability, so check before signing, not after.
Common Questions Answered
Does IR35 apply to sole traders?
No. The off-payroll rules target workers providing services through their own intermediary, usually a limited company (from GOV.UK, verified 19 Sep 2026). A genuine sole trader with no intermediary is instead assessed under ordinary employment status rules. False self-employment, working like an employee while invoicing as a sole trader, is still caught by employment status law rather than the off-payroll regime.
Does IR35 apply if I have several clients?
The rules apply contract-by-contract, so several clients usually signal genuine self-employment on each engagement (from GOV.UK, verified 19 Sep 2026). Each engagement still needs its own assessment, and a single inside-IR35 engagement does not taint the others. Substitution rights and a lack of client control across engagements strengthen an outside position.
Is IR35 the same as being self-employed?
No. IR35 asks whether an engagement would be employment if the intermediary were removed (from GOV.UK, verified 19 Sep 2026). Outside IR35 means the engagement is genuine self-employment for tax purposes. Inside IR35 means the engagement is employment for tax purposes even though the worker runs a company.
When did the current IR35 rules start?
The current rules started for public sector engagements in 2017 and for medium and large private and voluntary sector engagements on 6 April 2021 (from GOV.UK, verified 19 Sep 2026). The rules are unchanged in 2026: no new reform took effect. Small-client engagements still follow the pre-2021 pattern where the PSC self-assesses.
How Aqua Accounting Can Help
Aqua Accounting helps contractors settle IR35 before it costs them: contract reviews against real working practices, CEST guidance, and company accounting that holds its shape under either determination. The firm is an ICAEW Registered Member Firm of ICAEW Chartered Accountants, with 13+ years serving North East businesses from a UK-based team in Newcastle upon Tyne.
In practice that means status checks on each engagement before you sign, annual accounts, Corporation Tax, PAYE and dividend planning for inside and outside determinations alike. Book a consultation before your next contract starts, so you know where you stand under the off-payroll working rules and whether IR35 affects you from day one.
Disclaimer:
The information provided in this blog is for general informational purposes only and does not constitute professional advice. While every effort is made to ensure accuracy, Aqua Accounting accepts no responsibility for any actions taken based on this content. You should seek professional advice tailored to your individual circumstances.
Omar Ahmed is an ICAEW Chartered Accountant and the Director of Aqua Accounting, a UK-based accountancy practice providing expert accounting and tax services to individuals, sole traders, and small to medium-sized businesses. As a trusted accountant in Newcastle, he offers expertise in annual accounts, self-assessment tax returns, company accounts, VAT, payroll, bookkeeping, and company formation.
With a strong focus on delivering clear and practical financial advice, Omar helps clients stay compliant while improving their understanding of their finances. Through Aqua Accounting, he works closely with business owners to simplify accounting processes, meet tax obligations, and support informed financial decision-making.