Quick Summary
- IR35 (the off-payroll working rules) decides whether a contractor working through their own limited company should be taxed like an employee.
- For public sector and medium or large private sector clients, the client decides your status and must give you a Status Determination Statement.
- For small private sector clients, your own company decides.
- Inside IR35 means PAYE income tax and National Insurance are deducted before you are paid, which usually means a lower take-home.
- Status depends on the real working arrangements — control, substitution and mutuality of obligation — not just the contract wording.
If you are a contractor working through your own limited company — in IT, engineering, construction management or consulting — IR35 has a big effect on how much you take home. This guide explains how the rules work in 2026/27, who is responsible for deciding your status, and what you can do about it.
What is IR35?
IR35 is anti-avoidance legislation. It targets "disguised employment": where someone works like an employee but is paid through their own limited company (a personal service company) to benefit from lower tax on dividends. If a contract is inside IR35, the income is taxed broadly like employment income. If it is outside IR35, your company is treated as a genuine business.
Who decides your IR35 status?
| Your client | Who decides status | Who deducts tax if inside |
|---|---|---|
| Public sector body | The client | The fee-payer (agency or client) |
| Medium or large private company | The client | The fee-payer (agency or client) |
| Small private company | Your own company | Your own company |
A private client is generally "small" if it meets at least two of these: turnover of £15 million or less, balance sheet total of £7.5 million or less, and 50 or fewer employees. Clients that are medium or large must give you a Status Determination Statement (SDS) explaining their decision, and must have a process for you to disagree with it.
How is IR35 status decided?
There is no single test. HMRC and the tribunals look at the whole picture, especially:
- Control — does the client decide how, when and where you do the work, or just what the end result should be?
- Substitution — could your company genuinely send someone else to do the work, and would the client accept it?
- Mutuality of obligation — is the client obliged to offer work and are you obliged to accept it?
- Financial risk — do you invest in equipment, fix mistakes at your own cost, or price by project?
- Part and parcel — are you treated like staff (line management, staff benefits, internal email signature as an employee)?
HMRC's online Check Employment Status for Tax (CEST) tool gives a view, but it is not the final word. What happens day to day matters more than the contract: a well-drafted "outside" contract will not help if in practice you are managed like an employee.
Inside IR35: what it means for your pay
Where the client decides (public sector, medium or large clients) and the contract is inside, the fee-payer treats the payment to your company as a deemed employment payment. They deduct income tax and employee National Insurance, and pay employer National Insurance, before paying your company. Your company does not pay Corporation Tax on that income again.
Many contractors with inside IR35 roles choose to work through an umbrella company instead. From April 2026, recruitment agencies (or the client, where there is no agency) are responsible for making sure PAYE is properly operated when workers are paid through an umbrella company, which aims to tackle non-compliant umbrella schemes.
Where your own company decides (small clients) and the contract is inside, your company must calculate the deemed payment at the end of the tax year, with a 5% allowance for expenses, and pay the tax through payroll.
Outside IR35: running your company properly
Outside IR35, your company is taxed as a normal business. Most directors take a small salary and dividends, pay Corporation Tax at 19% to 25% on profits, and claim legitimate business expenses. See our guide to director salary vs dividends for the 2026/27 figures. You still need to keep good evidence that the engagement is outside — contract reviews, working practice notes and correspondence about substitution.
Practical steps for contractors
- Ask for the SDS before you start a contract with a medium or large client.
- Check the working practices match the contract, and keep notes if they change.
- Use the client's disagreement process if you believe the decision is wrong — they must respond within 45 days.
- Compare take-home pay inside IR35 through the agency's PAYE, an umbrella company, or a higher day rate.
- Keep inside and outside income clearly separated in your company's records.
Frequently Asked Questions
What does inside IR35 mean?
It means HMRC treats your contract as disguised employment, so the payment for that work is taxed broadly like a salary. Income tax and National Insurance are deducted before the money reaches your company.
Who decides if I am inside or outside IR35?
For public sector clients and medium or large private sector clients, the client decides and must give you a Status Determination Statement. For small private clients, your own limited company decides.
Can I challenge an inside IR35 decision?
Yes. Medium and large clients must have a status disagreement process. They must consider your reasons and respond within 45 days, either confirming the decision with reasons or changing it.
Does IR35 apply to sole traders?
No. IR35 applies where a worker provides services through an intermediary such as their own limited company. Sole traders face a separate employment status test, but not IR35 itself.
Is it worth having a limited company if I am inside IR35?
Often not for that contract. Inside IR35 income gets little tax benefit from a company, so many contractors use an umbrella company or agency PAYE for inside roles and keep their company for outside work.
Contractor Accountant in Glasgow
We help contractors review IR35 status, run their limited company efficiently and keep inside and outside work properly recorded.
Sardar Muhammad, AAT
Sardar is the founder of LimeTree Accounting Solutions, an AAT-accredited practice in Govanhill, Glasgow. He works with sole traders, tradespeople, landlords and small limited companies across Glasgow and Clydebank.
This guide is general information based on UK and Scottish tax rules as at 13 October 2026. It is not personal advice. Rates and thresholds change, so speak to us about your own situation.