What Is IR35? Understanding the UK's off-payroll working rules

If you're a contractor, freelancer, or business hiring temporary talent in the UK, understanding IR35 is essential. IR35 is common shorthand for UK tax rules that apply when an individual provides services through an intermediary, such as their own limited company. The rules consider whether the individual would have been an employee for tax purposes if they had contracted directly with the client.

Who determines the status and accounts for any PAYE depends on the client, the intermediary and the structure of the labour supply chain.

Whether a contract falls inside or outside IR35 can significantly impact taxation, take-home pay, and compliance responsibilities.

In this guide, we explain what IR35 is, how the IR35 rules work, the difference between inside and outside IR35, and how employment status is determined.

What is IR35?

IR35 is common shorthand for UK tax rules that consider whether an individual providing services through an intermediary would have been an employee for tax purposes if they had worked directly for the client.

IR35 is commonly used to describe the Intermediaries Legislation and the related off-payroll working rules. The rules aim to ensure that individuals working in an employee-like way through an intermediary account for broadly similar Income Tax and National Insurance contributions to employees.

The rules primarily affect individuals providing services through limited companies and other intermediary arrangements.

Key takeaway

IR35 applies to individual engagements, not to a contractor permanently. The same person can have one engagement within the rules and another outside them.

Who does IR35 apply to?

The rules may affect a worker who supplies services through their own intermediary, the client receiving those services, and any agency or other labour supplier in the contractual chain. Chapter 10 applies to public authorities and to medium or large private and voluntary-sector clients with a UK connection.

Where the client is a small private or voluntary-sector organisation, the worker’s intermediary normally determines whether the rules apply. For organisations managing a contingent workforce, understanding these responsibilities is important when engaging contractors through intermediaries.

What is a Personal Service Company (PSC)?

A Personal Service Company (PSC) is not a separately defined legal company type. The term usually describes a limited company controlled by a worker through which that worker provides services to clients.

How does IR35 work (inside vs outside IR35)

The party responsible for the determination must assess the contractual terms and actual working arrangements as a whole. A contract may describe a worker as self-employed, but the written terms alone do not determine IR35 status. HMRC may subsequently review or challenge the determination.

Every assessment ultimately leads to one of two outcomes:

• Inside IR35
• Outside IR35

So, what is inside and outside IR35, and what does each status mean for contractors? The key difference is whether the engagement is treated as employment for tax purposes under the IR35 rules.

What is inside IR35?

An engagement is commonly described as “inside IR35” when the worker would have been an employee for tax purposes if engaged directly. Under the client-led off-payroll rules, the deemed employer normally deducts PAYE Income Tax and employee National Insurance from the taxable payment and pays employer National Insurance contributions. Where responsibility remains with the worker’s intermediary, the intermediary must apply the deemed employment payment rules.

An inside-IR35 determination is a tax-status decision. It does not, by itself, make the worker an employee of the client or give the worker employment rights such as holiday pay, statutory payments or automatic pension enrolment from the client or deemed employer.

The tax treatment may affect net income, but the actual result depends on the rate, payment structure and individual circumstances.

What is outside IR35?

An engagement is commonly described as “outside IR35” when the hypothetical direct relationship between the worker and client would not be employment for tax purposes. No deemed employment payment arises under IR35 for that engagement, and payments to the intermediary continue to be treated under the normal rules applicable to that business.

Inside vs outside IR35 broken down simply:

Why does the distinction matter?

The difference between inside and outside IR35 can affect:

• How Income Tax and National Insurance are accounted for

• Take-home earnings

• Payroll responsibilities

• Contractor and client compliance obligations

• How an assignment is structured

How is IR35 status determined?

IR35 status is determined by assessing the contractual terms and actual working arrangements as a whole rather than relying on a single factor.

Control

Who decides:

• How work is completed?

• When it is completed?

• Where it is completed?

• What work is completed?

Generally, the greater the control exercised by the client, the more likely the engagement resembles employment.

Right of substitution

Can the contractor provide a suitably qualified substitute to perform the work?

A genuine and practical right for the intermediary to provide and pay a substitute can point away from employment. A clause that cannot realistically be used, or gives the client an unrestricted veto, may carry little weight.

Mutuality of obligation

Mutuality of obligation considers the obligations binding the parties. At a minimum, an agreement to perform work personally in return for payment can establish the necessary “wage-work bargain”. The absence of any promise of future work does not, by itself, determine that a particular engagement is outside IR35; the wider relationship must still be evaluated.

Additional considerations

Other factors considered may include:

• Financial risk
• Provision of equipment
• Integration into the client business
• Length of engagement
• Ability to work for multiple clients

Who decides IR35 status?

All public authorities and medium or large private and voluntary-sector clients with a UK connection are generally responsible for determining the worker’s status. They must take reasonable care and provide a Status Determination Statement to the worker and the person or organisation with which they contract. For a small private or voluntary-sector client, responsibility normally remains with the worker’s intermediary. Different rules also apply where the client is wholly overseas without a UK connection.

What is a Status Determination Statement (SDS)?

A Status Determination Statement is the client’s conclusion about whether the off-payroll working rules apply to an engagement, together with the reasons for that conclusion. A valid SDS requires reasonable care and should be issued whether the conclusion is inside or outside the rules. Workers and deemed employers may raise a disagreement, which the client must consider and normally answer within 45 days.

Can an IR35 calculator help?

Yes. IR35 calculators and status-checking tools can provide useful guidance, but their purpose and level of authority vary.

Can a take-home-pay calculator determine IR35 status?

No. A take-home-pay calculator can illustrate possible deductions using assumed rates, but it cannot determine employment status.

What is HMRC’s CEST tool?

HMRC’s Check Employment Status for Tax tool assesses a specific engagement and gives HMRC’s view based on the information entered. HMRC says it will stand by the result where the information is accurate, remains accurate and is provided in accordance with its guidance. A completed result can also be used as an SDS, although the responsible client must still take reasonable care.

What does IR35 mean for contractors?

IR35 can influence several aspects of a contractor's career, including:

• Take-home pay and salary considerations

• Tax responsibilities

• Contract selection

• Compliance requirements

• Assignment structure

For contractors working in engineering, energy, infrastructure, life sciences, technology, and other project-based industries, understanding IR35 is often a key part of evaluating new opportunities.

Frequently asked questions about IR35

Does IR35 apply to limited companies?

IR35 may apply where an individual provides services through their own limited company or another qualifying intermediary and would have been an employee for tax purposes if engaged directly. It does not automatically apply to every limited company or every contract.

Does IR35 apply to self-employed workers?

IR35 specifically concerns services provided through an intermediary. A sole trader engaged directly does not ordinarily fall within IR35, although normal employment-status and agency rules may still need to be considered.

Does being inside IR35 give a contractor employment rights?

No. Being inside IR35 means the engagement is treated as employment for tax purposes, but this does not automatically make the contractor an employee of the client or give them employment rights such as holiday pay, statutory payments or automatic pension enrolment.

Who deducts PAYE when a contract is inside IR35?

For medium and large private-sector organisations and public-sector clients, the deemed employer, often the organisation paying the contractor's intermediary, is generally responsible for deducting PAYE Income Tax and employee National Insurance contributions. Where the client is a small private or voluntary-sector organisation, responsibility normally remains with the contractor's intermediary.

Can a contractor challenge a Status Determination Statement (SDS)?

Yes. A contractor can disagree with a Status Determination Statement and ask the client to reconsider its decision. The client must consider the reasons for the disagreement and normally respond within 45 days, either confirming the original determination with reasons or issuing a new SDS.

Does IR35 apply separately to each contract?

Yes. IR35 status is assessed engagement by engagement rather than applying permanently to a contractor. This means the same contractor could have one engagement that falls inside IR35 and another that falls outside IR35, depending on the contractual terms and actual working arrangements.

Does IR35 apply when working through an umbrella company?

IR35 does not usually apply in the same way when a contractor is employed by an umbrella company and their earnings are already subject to PAYE. However, the exact tax treatment depends on the working and contractual arrangements.

How Airswift supports contractor hiring

Navigating IR35 is an important consideration when hiring contractors in the UK. Airswift works with companies across engineering, renewable energy, technology and other specialist industries where flexible talent plays a key role.

Explore our talent acquisition solutions to learn more about contractor hiring with Airswift.