IR35 — formally the off-payroll working rules — exists to stop someone working like an employee while being paid through a company to save tax. If your contract is caught by IR35 it is inside IR35; if it is genuine business-to-business work it is outside IR35. The label decides how you are taxed, and the gap between the two can be thousands of pounds a year.
Inside vs outside, in plain terms
- Inside IR35: you are taxed broadly like an employee. In practice you are usually paid through an umbrella company on PAYE, with Income Tax, employee National Insurance and — taken from the assignment rate — employer National Insurance and the Apprenticeship Levy.
- Outside IR35: you are genuinely in business. You can trade through your own limited company, paying Corporation Tax on profit and drawing dividends, which is normally more tax-efficient.
Put the same day rate through both and you can see the difference for yourself on the IR35 calculator.
Who decides your status
It is not your choice, and since April 2021 it is usually not your decision either. For contracts with medium and large clients in the private sector (and all public-sector bodies), the client determines your status and must give you a Status Determination Statement. Only when you work for a genuinely small client does the responsibility for deciding — and getting it right — stay with your own company.
The tests that matter
Status turns on how you actually work, not what the contract says. Three factors carry the most weight:
- Control: does the client direct how, when and where you do the work, like a manager would?
- Substitution: could you genuinely send a qualified substitute in your place, or must it be you personally?
- Mutuality of obligation: is the client obliged to offer work and you to accept it, as in employment?
The more you look like an employee on these, the more likely you are inside IR35. HMRC's free CEST tool gives an indicative result, though it is not the last word.
What it means for your pay
Inside IR35, expect to keep roughly 60–65% of your contract value after employer NI and PAYE. Outside IR35, roughly 65–75% after Corporation Tax and dividend tax, before expenses and pension. The gap has narrowed — employer National Insurance rose to 15% in April 2025 and dividend rates rose two points in April 2026 — but outside IR35 is usually still ahead. Whichever applies, work the numbers through with the contractor take-home calculator before you commit to a rate.
This is general guidance for 2026/27, not a status determination or tax advice. Always confirm your IR35 position with a qualified adviser and HMRC's CEST tool.