IR35 Explained for Contractors and Directors

What is IR35?

IR35 — formally the off-payroll working rules — is tax legislation designed to prevent 'disguised employment'. If you work through a limited company but your relationship with a client is essentially that of an employee, HMRC treats your income as employment income subject to full PAYE tax and NI.

Why it matters financially

Outside IR35, a director on £450/day can take most of their income as dividends taxed at 8.75%. Inside IR35, the same income is treated as a salary — taxed at 20–40% income tax plus 8% employee NI. The difference is typically £15,000–£25,000 per year on a £100,000+ contract. Use the IR35 calculator to model your specific figures.

Who decides your IR35 status?

For medium and large engagers (clients), the responsibility to make a Status Determination Statement (SDS) lies with the client. They must assess whether the role falls inside or outside IR35 using HMRC's CEST tool or professional advice. For small clients (two of: turnover under £10.2m, balance sheet under £5.1m, fewer than 50 employees), the responsibility remains with your company.

The three key tests

IR35 status is determined by looking at the hypothetical contract — how the relationship would be characterised if you were directly engaged:

• Substitution — can you send a qualified substitute in your place without needing client approval?
• Control — does the client control how (not just what) work is done?
• Mutuality of obligation (MOO) — is the client obliged to offer work and are you obliged to accept it?

These are not exhaustive — the overall picture of the relationship matters. Other factors include financial risk, provision of equipment, and integration into the client's business.