IR35 Explained: The Complete Guide for UK Contractors (2026)

The short version

If you only read one part of this guide, read this:

• IR35 decides whether a contract is taxed like self-employment (outside IR35) or like employment (inside IR35). It's judged one contract at a time, not on you as a person.
• Who decides depends on your client. A medium or large client decides and issues a Status Determination Statement. If your client is small, or based wholly overseas with no UK presence, the decision comes back to you.
• No single factor settles it. Control, whether you have to do the work personally, and mutuality of obligation matter most, but it's the whole picture, and how you actually work day to day, that counts.
• The written contract helps, but what happens in reality carries more weight if HMRC ever looks.
• Being inside IR35 isn't a punishment. It doesn't force you to close your company or move onto an umbrella, and you can hold outside-IR35 contracts before or after an inside one.

IR35 is one of the most misunderstood corners of UK tax, and it's easy to see why. The rules are fiddly, the language around them is dry, and a lot of the advice you'll find online manages to contradict itself. Strip away the jargon, though, and the legislation is really asking one thing: are you genuinely in business on your own account, or are you effectively working as an employee through a limited company? The answer matters because it changes how the income from that contract is taxed.

A quick note before we go further. Most of this guide assumes you're working, or thinking about working, through your own limited company, often called a personal service company, because that's where IR35 mainly bites. If you're sizing up your very first contract and haven't set anything up yet, or you're working through an umbrella company, we'll flag where things work differently for you as we go.

If you're outside IR35, your company is paid in the usual way and you continue to account for corporation tax, dividends and salary as normal. If you're inside IR35, the income from that engagement is generally taxed much like employment income. Since the off-payroll working reforms, the organisation paying you will often have responsibility for deciding this and operating PAYE before your company receives the funds.

One thing worth getting clear on early is that IR35 works at the level of each individual engagement, not at the level of you as a person. It's perfectly possible to have one contract that falls outside IR35 and another that falls inside. Likewise, being inside IR35 today doesn't prevent you from taking an outside IR35 contract next month.

In this guide we'll explain how the legislation works, who decides your status, the factors HMRC and the courts look at, and some of the common misconceptions that catch contractors out.

Why does IR35 exist?

Before IR35 was introduced, it was possible for someone to leave permanent employment on a Friday, return to the same desk on Monday through their own limited company, carry out exactly the same role, but pay significantly less tax.

The difference in take-home could be substantial. Most of the saving came from National Insurance, which dividends don't attract, and when IR35 first arrived in 2000 dividends falling within the basic-rate band were effectively taxed at 0% in your hands as well, thanks to a notional tax credit that has since been scrapped. So two people doing an identical job, one as an employee and one through a company, could walk away with very different amounts.

HMRC viewed that as unfair. As far as it was concerned, nothing about the actual job had changed: the same person was doing the same work, in the same place, for the same organisation, just with a company sitting in the middle.

IR35 was introduced in 2000 to tackle these arrangements, often referred to as "disguised employment". That doesn't mean HMRC is trying to prevent people from contracting through limited companies. Genuine contractors take commercial risks that employees don't. They market their own services, can work for multiple clients, and aren't integrated into a client's business in the same way as employees.

The legislation is designed to distinguish between those genuinely operating independent businesses and those who, in reality, are working under employment-like arrangements.

Who decides whether you're inside or outside IR35?

The answer depends on who you're working for.

Since April 2021, the private sector IR35 rules have split responsibility between contractors and clients. Broadly, there are two scenarios you might fall into.

1. You're working for a medium or large client

If your end client is a medium or large business, it's their responsibility to decide whether your engagement falls inside or outside IR35.

They'll usually assess the contract, consider how the engagement actually works day to day and issue a Status Determination Statement (SDS). This sets out their conclusion and the reasons for it.

If they decide the contract is inside IR35, the organisation paying your company, often the recruitment agency or the client themselves, will normally deduct Income Tax and National Insurance before paying your company.

That doesn't necessarily mean you stop trading through your limited company. Many contractors continue to invoice through their company, but the income from that engagement reaches the company after PAYE has already been applied.

2. You're working for a small or wholly overseas client

The rules are different if your end client qualifies as a small company.

In that case, responsibility stays with you. Your company must consider the engagement and decide whether IR35 applies.

A company is generally treated as small if it meets at least two of the following conditions:

• Annual turnover of no more than £15 million.
• A balance sheet total of no more than £7.5 million.
• An average of no more than 50 employees.

If the client isn't a company, for example an individual or an unincorporated business, different rules can apply, but for most contractors these are the thresholds you'll come across.

One timing point catches people out. These higher turnover and balance sheet figures only apply to company financial years starting on or after 6 April 2025, and there's a built-in lag before they actually change anything for IR35. Because a client's size is judged on its most recently filed accounts, the earliest a client that's currently medium or large could become “small” for off-payroll purposes is the 2027/28 tax year. So if you're sizing up a client today, don't assume they've dropped out of the rules just because their latest accounts happen to fall under the new limits.

There's one other situation where the decision comes back to you, and it catches a lot of contractors out: a client based wholly overseas with no UK presence. If your end client has no UK office, branch or other permanent establishment here, the off-payroll rules simply don't reach them, so they aren't required to assess your status or issue a determination. Responsibility then sits with your own company, just as it would with a small client. It's a genuinely fiddly corner, though, because things like where you actually carry out the work and your own tax residency can change the answer, so it's worth getting advice if you're working for an overseas client.

Can you challenge the decision?

Yes, you can. If a medium or large client decides that your contract falls inside IR35 and you disagree, you're entitled to challenge their Status Determination Statement.

The client must have a process for considering disagreements and respond with either:

• confirmation that the original determination stands, together with their reasons, or
• a new Status Determination Statement if they change their view.

It's worth remembering that the client isn't obliged to agree with you. They're responsible for applying the legislation correctly and, in many cases, they carry the financial risk if they get the decision wrong.

For that reason, some organisations take a cautious approach and determine that large groups of contractors are inside IR35 without carrying out a detailed assessment of each engagement. While this isn't prohibited, blanket assessments have been criticised because IR35 is intended to be considered on a contract-by-contract basis.

How is IR35 status decided?

There's no single test for IR35.

Instead, HMRC and the courts look at the overall working relationship between you and your client. The written contract is important, but it's only part of the picture. If the contract says one thing and the reality is different, it's the reality that usually carries more weight.

Over the years, employment status has been shaped by a long line of court cases. While every case turns on its own facts, there are three factors that consistently carry the greatest weight.

1. Control

One of the strongest indicators is the amount of control your client has over the work you do.

An employee is typically told what to do, how to do it, when to do it and where to do it. An independent contractor is usually engaged to deliver a particular outcome and has more freedom over how they achieve it.

That doesn't mean clients can't have any control. They can still set deadlines, agree deliverables, require attendance at meetings or expect work to meet certain standards.

The question is whether they're controlling the result, or controlling the way you carry out the work.

For example, if you're engaged to build a software feature, it's perfectly reasonable for the client to specify what they need and when they need it by. That's very different from supervising your day-to-day work, approving your hours, dictating your methods and treating you like a member of staff.

2. Substitution

A genuine business can usually decide who performs the work.

If your contract allows you to send a suitably qualified substitute, and that right is genuine rather than theoretical, it points towards self-employment.

Substitution clauses are often misunderstood.

Simply including a substitution clause in a contract isn't enough if everyone knows it would never be accepted. Equally, the fact that you've never actually used a substitute doesn't automatically mean you're inside IR35.

HMRC and the courts are more interested in whether the right genuinely exists and could realistically be exercised if the circumstances arose.

3. Mutuality of obligation

This is often referred to as "MOO" and is probably the least understood of the three main tests.

It considers whether:

• the client is obliged to keep providing work, and
• you're obliged to keep accepting it.

An employment relationship often has this ongoing obligation. An employer is expected to provide work and pay the employee, while the employee is expected to continue carrying out that work.

Many contractor engagements are different. They're based around delivering a particular project or piece of work, usually for a set period, and once that's complete neither party is under any obligation to continue the relationship.

It's worth being a bit careful here, because a fixed end date doesn't settle the question on its own. It's easy to assume that “it's only a six-month contract” automatically points away from employment, but that isn't how it works. The PGMOL case made clear that mutuality can still exist within an engagement you've agreed to, even one with a defined length, and equally that a long, regular pattern of work doesn't create mutuality if there's no real obligation to offer or accept it. The duration is part of the picture, not the whole answer.

Mutuality is also the area where the law has moved most in recent years. After the Supreme Court's decision in the long-running PGMOL case in 2024, the accepted position is that a basic level of mutuality, you do some work and you get paid for it, exists in almost any contract, so on its own it rarely settles anything. What carries weight is the nature of the ongoing obligations, looked at alongside control, substitution and the rest of the picture, rather than treated as a single deciding test.

Other factors that can influence IR35 status

The three tests above tend to carry the greatest weight, but they're not the whole picture. HMRC and the courts will also consider the wider relationship between you and your client.

Financial risk

Independent businesses generally take commercial risks. You might quote a fixed price for a project, correct defective work at your own expense or invest in training and equipment without knowing when you'll recover the cost. Employees rarely face those kinds of risks. They're paid regardless of whether a project turns out to be more difficult than expected.

Providing your own equipment

If you're using expensive specialist equipment that you've purchased yourself, that can support an argument that you're operating independently. That said, this factor carries less weight than it once did. In many industries, particularly IT, contractors use a client's laptop and systems for security reasons. On its own, that doesn't determine IR35 status.

Being part of the client's organisation

The more you're treated like an employee, the more likely it is that HMRC will question whether the engagement is genuinely one of self-employment. For example, you might be integrated into management structures, have line management responsibilities, appear on internal organisation charts or receive employee benefits. By contrast, genuine contractors are usually brought in to provide a specific service rather than becoming part of the organisation itself.

Working for multiple clients

Having several clients at the same time isn't a legal requirement for being outside IR35. However, it can help demonstrate that you're running an independent business rather than working exclusively for one organisation in an employee-like capacity. Many contractors move between long-term engagements, so this is just one factor among many.

No single factor determines the outcome

It's tempting to look for a checklist:

• Do I have a substitution clause?
• Do I work from home?

• Do I use my own laptop?

   

It would be much simpler if it worked like that, but it doesn't. Status is determined by looking at the engagement as a whole. One factor on its own is rarely decisive. That's why two contractors doing similar work for different clients can legitimately have different IR35 outcomes. The day-to-day working arrangements, contractual terms and overall relationship all matter. When deciding whether a contract falls inside or outside IR35, it's the complete picture that's important, not any single feature in isolation.

What is a Status Determination Statement (SDS)?

If you're working for a medium or large client, you've probably come across the term Status Determination Statement, usually shortened to SDS. It's a written statement that sets out the client's decision on whether your engagement falls inside or outside IR35.

The SDS should also explain how the client reached that conclusion. Simply stating "inside IR35" or "outside IR35" isn't enough. The client is expected to consider the facts of the engagement and provide the reasons behind their decision.

Once the SDS has been issued, it should be shared with both you and the organisation paying your company, if that's someone else, such as a recruitment agency. Many clients complete an SDS before the engagement starts, although it can also be reviewed if the working arrangements change.

What if you disagree?

Receiving an SDS doesn't mean the decision is final. If you believe the client has misunderstood the engagement or reached the wrong conclusion, you can challenge it using the client's disagreement process. For example, you might explain that:

• the written contract doesn't reflect how the engagement works in practice,
• you have a genuine right of substitution that wasn't taken into account,
• the client has misunderstood the level of control they exercise, or
• the engagement has changed since the SDS was originally prepared.

The client must consider your representations and respond. They can either:

• confirm that the original determination stands and explain why, or
• withdraw the original SDS and issue a new one.

That doesn't necessarily mean they'll change their mind, but they are required to consider the challenge rather than simply ignore it.

What happens if you're inside IR35?

Being inside IR35 isn't a black mark against you, and it doesn't mean you've done anything wrong. It just means that, for tax purposes, the engagement is treated as close enough to employment that the income from it should be taxed in much the same way.

One thing that catches people out, and feels genuinely unfair to a lot of contractors, is that being taxed like an employee doesn't make you one. If you're inside IR35 through your own company, you pay broadly employee-level tax but you don't pick up employee rights from the client, so there's no holiday pay, sick pay, pension auto-enrolment or redundancy entitlement. (If you work through an umbrella, it's different, because the umbrella employs you and you get statutory rights from them.) What happens next depends on who is responsible for applying the rules.

One thing to clear up first: this part assumes you're working through your own limited company. If you're paid through an umbrella company instead, IR35 doesn't really come into it, because the umbrella already employs you and runs everything through PAYE, so your pay is taxed like a normal salary from the start. The inside-or-outside question, and the mechanics below, are about money flowing to your own company.

If your client is a medium or large business

In most cases, the organisation paying your company, known as the fee-payer, will deduct Income Tax and National Insurance before making payment. Your company receives the net amount after those deductions have been made. This often surprises contractors because the money is still paid to their limited company, but it has already been taxed in a similar way to employment income.

You should not pay yourself dividends from that income as though it were ordinary company profit. The deemed employment income rules are designed to ensure the same income isn't taxed twice.

If your client is a small business

If the client qualifies as small, your company remains responsible for assessing the engagement and applying the IR35 rules where appropriate. If you conclude that a contract falls inside IR35, your company will need to account for the deemed employment payment when calculating its tax position.

It's worth going in with your eyes open here, because that deemed payment is taxed much like a salary and includes employer's National Insurance, which sits at 15% on most of the contract value from April 2025 and has to come out of the fee. That's a big part of why an inside-IR35 contract run through your own company can work out less generously than the headline day rate suggests.

These calculations can get technical, so it's worth having support if you regularly take on inside-IR35 work through your limited company. This is exactly the sort of thing we help with at Mighty: we can handle the deemed payment calculations and run the payroll for you, so you don't have to get into the weeds of it yourself.

Can you still use a limited company?

Yes, you usually can. One of the biggest misconceptions about IR35 is that an inside-IR35 contract forces you to close your company or move onto an umbrella, and that simply isn't true. Whether you can continue using your limited company depends on how the client engages contractors and how the contract is structured.

Some organisations only engage contractors through umbrella companies. Others are happy to continue working with limited companies, even where the engagement falls inside IR35. It's a commercial decision rather than a requirement of the legislation.

Can you have both inside and outside IR35 contracts?

Yes, and many contractors do. IR35 applies to individual engagements, not to your company as a whole. For example, you might spend six months working on an inside IR35 contract for a large bank before moving to an outside IR35 engagement with a smaller technology business.

Each contract should be assessed on its own merits. The fact that one engagement falls inside IR35 doesn't automatically affect the status of your next contract.

Common misconceptions about IR35

"I have a limited company, so I'm outside IR35."

This is the one we hear most, and it's the wrong way round. IR35 exists precisely because contractors work through intermediaries like limited companies, so having one is what brings the rules into play, not what gets you out of them. Your status comes from the working relationship with your client, not from the company you invoice through.

"My contract says I'm outside IR35."

The wording of the contract is important, but it isn't conclusive. HMRC and the courts will look at how the engagement actually operates. If the written contract says one thing but the day-to-day reality says another, the reality is likely to carry more weight.

"Working from home means I'm outside IR35."

Not on its own. Remote working is normal across all sectors now, including for permanent employees, so where you happen to sit is only ever one small part of the wider picture.

"Using my own laptop makes me outside IR35."

Providing your own kit can help show you're operating independently, but it won't decide the outcome by itself, and in plenty of industries, IT especially, you'll be required to use the client's equipment for security reasons anyway.

"Every public sector contract is inside IR35."

Plenty of public sector engagements are outside IR35. Just as everywhere else, each one should be assessed on its own facts rather than waved through with a blanket assumption.

Practical tips for contractors

Most IR35 disputes don't arise because of a single clause in a contract. They arise because the written agreement and the day-to-day working relationship don't match. If you're working outside IR35, it's worth making sure your working practices support that position.

Review the contract before you sign it

The contract should accurately reflect how the engagement will really work. For example, if the contract states that you have a right of substitution or significant control over how the work is carried out, those provisions should be genuine. Contract terms that exist only on paper are unlikely to carry much weight if HMRC ever reviews the engagement.

If you're not certain a contract stacks up, this is a good moment to get it looked at properly. At Mighty we work with leading IR35 specialists such as Qdos, who can review the contract and your working practices and give you a clear, defensible view on where the engagement sits, which is a far better footing than guessing or relying on an online tool.

Keep evidence of how you work

If your IR35 status is ever challenged, contemporaneous evidence can be just as important as the contract itself. Depending on the engagement, this might include:

• Statements of work.
• Project specifications.
• Emails showing that you controlled how the work was delivered.
• Evidence of working for multiple clients.
• Professional indemnity insurance.
• A business website or marketing material.

None of these documents determine IR35 status on their own, but together they help demonstrate that you're operating an independent business. It's also worth knowing that many contractors take out IR35 or tax-enquiry insurance. It won't change your status, but it covers the cost of defending an HMRC enquiry, and some policies cover the tax at stake too, which can take a lot of the worry out of an outside-IR35 position.

Review each engagement separately

A contractor might spend several years working outside IR35 before accepting an engagement that falls inside the rules. Equally, an inside IR35 engagement doesn't prevent the next contract from being outside IR35. Each contract should be considered on its own facts. It's a mistake to assume that because one client reached a particular conclusion, every future engagement will be treated in the same way.

Take care with contract extensions

A short project that gradually evolves into a long-term role can change the nature of the working relationship. If your responsibilities, reporting lines or day-to-day working arrangements change over time, it's sensible to review the IR35 position rather than relying on the original assessment indefinitely.

Frequently asked questions

Can I have one inside IR35 contract and another outside IR35?

Yes. IR35 applies to each engagement individually. It's common for contractors to move between inside and outside IR35 contracts during their career.

Does using a recruitment agency change anything?

Not for your status, no. The agency may be the one operating PAYE if it's the fee-payer, but that has no bearing on whether the engagement is inside or outside IR35. Your status still comes from the working relationship with the end client.

Should I use HMRC's CEST tool?

HMRC's Check Employment Status for Tax (CEST) tool is used by many organisations as a starting point, and HMRC says it will stand by the result where the tool has been used correctly and the answers given are accurate. It was refreshed in April 2025 with clearer wording and a new opening step that checks a contract is actually in place.

Like any online assessment tool, however, its conclusions are only as good as the information entered, and it shouldn't be treated as a substitute for understanding how the engagement actually works, particularly where the facts aren't clear-cut. CEST also has its critics, who point out that it doesn't really grapple with mutuality of obligation, and its underlying logic wasn't changed in the 2025 refresh. For anything borderline, we'd suggest not leaning on a CEST result on its own. A proper status review from a specialist tends to be far more reliable, and at Mighty we work with leading IR35 specialists such as Qdos who can assess an engagement properly and stand behind the conclusion.

Does having business insurance make me outside IR35?

On its own, no. Professional indemnity cover, public liability insurance and similar business policies can help support the argument that you're running a genuine business, but they won't determine your IR35 status by themselves.

Final thoughts

IR35 often gets boiled down to a straight choice: contractor or employee. Day to day, the line is blurrier than that, and where a particular engagement sits can come down to the detail of how you actually work. The legislation looks at each engagement individually and asks whether the working relationship is genuinely one of self-employment or whether it more closely resembles employment. For many contractors, the answer will change over the course of their career. 

It comes down to understanding how the rules work, making sure your contracts reflect the reality of the engagement, and reviewing your position whenever your working arrangements change. If you're unsure whether a contract falls inside or outside IR35, it's far easier to assess it before signing than to resolve a dispute after the work has started.

Need a hand with IR35?

IR35 is a lot to keep on top of, especially when you're moving between contracts or working out what an inside-IR35 role actually leaves you with. That's exactly the sort of thing we take off your plate.

At Mighty, we've built accounting software specifically for UK contractors, backed by an experienced team of accountants. We'll help you understand your take-home inside or outside IR35, handle the payroll and deemed payment calculations when a contract is caught, and point you to a proper status review when you need one. Whether you're taking on your first contract, juggling inside and outside engagements, or you just want an accountant who actually gets contracting, we're here for it. 

See how Mighty works, or book a chat with one of our contractor accountants here.

Further reading

If you'd like to explore the topic in more detail, these resources are well worth reading:

• IT Contracting publishes news, guides and resources for UK IT contractors, including market updates and advice on contracting.
• IR35 Update provides news and commentary on IR35, employment status and off-payroll working, together with updates on relevant case law and legislation.