IR35 Explained: The Rules Every UK Contractor Needs to Know

IR35 is tax legislation designed to catch contractors who work like employees but operate through a limited company to pay less tax. If HMRC decides your contract is caught, you pay broadly the same tax and National Insurance as a permanent employee would, even though you are not one.

Who decides your status depends on who you work for

Since April 2021, the end client (not the contractor) is responsible for determining IR35 status in medium and large businesses. They do this via a Status Determination Statement (SDS). Small companies still leave the determination to the contractor.

The factors HMRC considers

- Control - does the client dictate how, when, and where you work, rather than just what you deliver? - Substitution - can you send someone else to do the work in your place, and would the client accept them? - Mutuality of obligation - is the client obligated to keep offering you work, and are you obligated to accept it?

Being outside IR35 requires genuine business autonomy: working for multiple clients, providing your own equipment, and having the right to send a substitute. A contract that looks right on paper but does not reflect what actually happens day to day is the most common trap. HMRC can look past the written terms if the working arrangement tells a different story.

What inside IR35 actually means in practice

If your contract is caught, the fee-payer (usually the agency or the client directly) deducts tax and National Insurance before you receive payment. Your take-home will be materially lower. You can still pay yourself a salary and dividends through your company, but the tax advantage that makes contracting through a limited company attractive largely disappears.

If you are caught and have not been paying the right amount of tax, HMRC can pursue the debt and apply penalties. Get a proper contract review before you start an engagement, not after a problem arises.