What is IR35? A plain English guide for contractors (2026)

17th September 2026

If you're a contractor thinking about setting up a limited company, you've probably come across the term IR35. It is one of those pieces of tax legislation that can make contracting through your own company sound considerably more complicated than it needs to be. But what does it actually mean?

99p Company Formations explain in plain English below. 

What is IR35? 

IR35 is the commonly used name for the UK's off payroll working rules. It is designed to determine whether someone working through an intermediary, such as their own limited company, should be treated as an employee for tax purposes.

The rules were introduced to address situations where an individual provides their services to a client through an intermediary, usually their own limited company, but would have been considered an employee if they had provided those services directly.

The purpose of the rules is to make sure a worker who would effectively be an employee pays broadly the same Income Tax and National Insurance as an employee would.

Why was IR35 introduced?

Before IR35, there was an opportunity for some individuals to provide their services through companies rather than being directly employed by the organisation they worked for.

The issue was that two people could potentially perform very similar roles for the same organisation, but one could be taxed as an employee while the other operated through a limited company and extracted their income differently.

 

IR35 was introduced to address this distinction.

What does ‘inside IR35’ mean?

If a contract is inside IR35, the contractor is treated as an employee of the company they are providing services to for tax purposes. This means the income from the contract is subject to PAYE treatment under the off payroll rules.

Where the client is responsible for determining status, the deemed employer is responsible for deducting Income Tax and employee National Insurance from payments to the contractor's intermediary. Employer National Insurance and, where applicable, the Apprenticeship Levy are also dealt with by the deemed employer.

For a contractor operating through a personal service company, this can make a significant difference to the way money moves through the company.

It doesn't, however, mean you become an employee of the client in every legal sense. IR35 is fundamentally concerned with employment status for tax purposes.

Inside IR35 vs outside IR35: what's the difference?

The simplest way to understand the distinction is to think about who you are for tax purposes in relation to that particular contract.

The difference can have a substantial effect on your take-home income, although there is no universal figure because the financial outcome depends on the contract rate, expenses, pension contributions, company costs and how you take money from your company.

 

How does HMRC decide whether you're inside IR35?

Employment status is assessed by looking at the overall relationship between the contractor and client. No individual factor should automatically be treated as decisive. 

Control

Control concerns the extent to which the client controls the work you do. A genuinely independent contractor would have greater control over how they deliver the agreed service.

A client is still entitled to specify what they want delivered.

For example, consider whether the client decides:

• What work you do

• How you carry it out

• When you work

• Where you work

• The way the work should be performed

Personal service and substitution

Personal service is another important consideration. If the client has hired you specifically because they require you personally to perform the work, this can point towards employment. A right of substitution can point in the other direction.

For example, if your company has a contractual right to provide another suitably qualified person to complete the work when appropriate, this can support the argument that the company is providing a service rather than simply supplying your labour.

However, the right needs to be genuine. A substitution clause that exists only on paper but could never realistically be used is unlikely to carry much weight on its own.

Mutuality of obligation

Mutuality of obligation considers whether there is an ongoing expectation that:

• The client will continue providing work; and

• The worker will continue accepting it.

An employment relationship involves an ongoing obligation between the employer and employee. A genuine contractor relationship may instead involve a defined piece of work, after which the parties are free to decide whether they want to work together again.

Who decides whether you're inside or outside IR35?

This depends largely on the type and size of the client. The rules changed significantly when the off payroll reforms were introduced.

For public sector clients, the client is often responsible for determining the contractor's employment status. For medium and large private sector clients, the client is also generally responsible for making the determination. For a small private  sector client, responsibility remains with the contractor's intermediary, usually the contractor's own limited company.

This means the contractor doesn't always make the IR35 decision themselves.

If you work for a medium or large client

The client should determine whether the off payroll rules apply and provide a status determination statement (SDS) explaining its decision. The SDS should be provided to the relevant parties and include the reasons for the determination.

If you work for a small private sector client

The responsibility generally stays with your intermediary. If your limited company is the intermediary, your company needs to consider whether the engagement falls within the off payroll rules.

What is a status determination statement?

A status determination statement is a document explaining an IR35 decision.

Where the client is responsible for determining status, the client should provide the contractor and relevant parties with its conclusion and the reasons behind it. The statement should explain why the client reached that conclusion.

As a contractor, you should take the opportunity to read the reasoning.

If you believe the determination doesn't reflect the contract or your actual working practices, there is a process for raising concerns with the relevant party.

What happens if your contract is inside IR35?

If the rules apply, the party responsible for operating them must treat the relevant payment as employment income for tax purposes.

For a medium or large private sector client, for example, the deemed employer generally deducts Income Tax and employee National Insurance from the amount paid to your intermediary. Employer National Insurance and any applicable Apprenticeship Levy are also dealt with by the deemed employer.

Your limited company still exists. You haven't suddenly ceased to be a company.

The difference is that the income from the particular engagement is subject to the off payroll tax treatment. This can reduce the financial advantage of contracting through a limited company, which is why IR35 status is something to consider when assessing whether a contract is commercially worthwhile.

Does IR35 apply to sole traders?

The off payroll working rules are primarily concerned with situations where a worker provides services through an intermediary. A sole trader does not operate through their own limited company, so the usual PSC/off payroll structure isn't the same.

That doesn't mean a sole trader can describe themselves as self employed and assume that their status is settled.

Employment status rules still exist, and HMRC can assess whether someone is genuinely self employed or should be treated as an employee.

Can HMRC challenge an IR35 decision?

Yes. HMRC can examine employment status arrangements and investigate whether the tax treatment is correct. This is one reason contractors should keep good records.

If you're operating through a limited company, keep copies of relevant contracts, correspondence, invoices and records showing how the engagement operated. If a client has provided an SDS, keep it. If working practices change substantially during a contract, don't simply assume the original assessment remains appropriate.

Your circumstances should continue to reflect the position on which the IR35 decision was based.

What is HMRC's CEST tool?

HMRC provides an online tool called Check Employment Status for Tax (CEST). It is designed to help determine whether employment status rules apply to a particular engagement. The tool asks questions about the working relationship and provides HMRC's view based on the information entered. It can be useful as part of the assessment process.

If you're uncertain about a significant contract, particularly one with substantial financial value, professional advice may be appropriate.

What are the biggest IR35 mistakes contractors make?

IR35 can be complicated, but many problems begin with a few straightforward assumptions. Make sure you are not:

Assuming a limited company automatically means outside IR35: It doesn't. The company structure is only part of the picture. The relationship with the client is what matters.

Relying entirely on your contract: The actual working practices need to support what the contract says.

Treating every contract the same: Your IR35 status can change from one engagement to another.

Ignoring an SDS: If a client has determined your contract is inside IR35, don't disregard this.

Changing working practices without reviewing the position: A contract that was originally outside IR35 can potentially become harder to defend if the way you work changes significantly. When changes occur, address the contract immediately. 

Assuming ‘contractor’ means ‘self employed’: HMRC looks at the substance of the relationship.

Trying to avoid IR35 through artificial arrangements: IR35 isn't something to ‘get around’ and should be treated as seriously as any other tax obligation policy. 

Do you need an accountant if you're a contractor?

You don't legally have to appoint an accountant simply because you have a limited company. However, contractors operating through personal service companies have additional considerations that make professional accounting support particularly useful.

An accountant can help you understand matters such as:

• Corporation Tax

• PAYE

• Dividends

• Business expenses

• VAT

• Self Assessment

• IR35 implications

• Company accounts

• Confirmation statements

Should you set up a limited company if you're worried about IR35?

IR35 should form part of your decision about whether a limited company is the right structure for the work you're planning to do.

If you're an independent contractor with genuine control over your work and operate a real business with multiple clients or commercial risk, a limited company may be appropriate. If you're effectively working as an employee for one organisation, the advantages of a limited company may be less compelling, particularly where your contracts are likely to fall inside IR35.

Can 99p Company Formations assist with IR35? 

99p Company Formations specialises in helping entrepreneurs and contractors establish their limited companies. If you've decided that a limited company is the right structure for your contracting business, company formation is the first practical step.

Companies House does not decide whether your contract is inside or outside IR35. Your IR35 status depends on the individual engagement and the relationship between you and your client.

99p Company Formations can help you establish the company itself, while an accountant or IR35 specialist can help you assess the tax and employment status implications of your contracts.

If you've decided that contracting through a limited company is right for you, 99p Company Formations can help you take the first step and establish your company quickly and simply.

This article is intended as general information about IR35 and UK company formation. It is not tax, legal or financial advice. IR35 decisions depend on the circumstances of each individual engagement. If you're unsure about your employment status or the tax treatment of a contract, consider obtaining advice from a qualified accountant or IR35 specialist.