IR35 Explained — Inside vs Outside, Off-Payroll Rules, and Take-home Impact (2026/27)

IR35 is the common name for the UK’s “intermediaries legislation” — the rules that determine whether a contractor working through their own limited company should be taxed as a genuine business or as a disguised employee. Getting this right matters: the post-2024 reforms narrowed the outside-IR35 tax advantage, but the gap is still worth several thousand pounds a year at typical contractor rates.

What IR35 does

The basic question: if you removed the contractor’s limited company from the arrangement, would they look like a direct employee of the end client?

If yes → the engagement is inside IR35. Tax is deducted at source via PAYE (Income Tax + Employee NI) as though the contractor were on the end client’s payroll. The contractor keeps no limited-company tax advantages.

If no → the engagement is outside IR35. The contractor operates as a genuine business. They can pay themselves a tax-efficient salary + dividend split, run profits through Corporation Tax, and claim legitimate business expenses.

The status tests

HMRC doesn’t have a single rule. Instead, status is judged holistically across three primary factors:

1. Control

Does the client tell you exactly how, when, and where to do the work? Do they substitute you with their own staff at will? If yes, you look like an employee.

2. Mutuality of obligation

Is the client obliged to offer you work, and are you obliged to accept? If the contract gives both sides tight commitments like that, you look like an employee.

3. Substitution

Can you send a qualified substitute in your place, paid by you? If not — if the client insists you personally perform the work — that’s another signal of employment.

Secondary factors matter too: equipment, financial risk, taking work from other clients, business-like operation (website, insurance, PI cover).

HMRC publishes the Check Employment Status for Tax (CEST) tool (gov.uk/guidance/check-employment-status-for-tax) to give a determination. It’s criticised as over-simplistic but remains the starting point.

The 2021 off-payroll reforms

Before April 2021, the contractor (via their limited company) determined their own IR35 status. Since April 2021:

• Medium and large private-sector clients (and all public-sector clients since 2017) are responsible for determining status and communicating it via a Status Determination Statement (SDS).
• Small private-sector clients still leave the determination to the contractor’s own company (the old rules).

This shifted most of the risk from contractors to end clients — which is why many large firms now operate blanket “no outside IR35” policies.

Tax impact: inside vs outside

Inside IR35 — the PAYE route

You receive your day-rate income net of Income Tax and Employee NI, like a normal employee. At £500/day × 220 days = £110,000 turnover in 2026/27:

• Income Tax (after tapered PA £7,570): ~£34,432
• Employee NI: ~£4,812
• Take-home: ~£72,358

Outside IR35 — limited company

The tax-efficient structure:

1. Director salary of £12,570 (uses your Personal Allowance; 0% tax, minimal NI).
2. Corporation Tax on remaining profits:
   • 19% on the first £50,000 (small profits rate).
   • ~26.5% effective rate on profits £50,000–£250,000 (marginal relief).
   • 25% on profits above £250,000.
3. Dividends of post-CT profits, stacked on top of salary: £500 tax-free allowance, then 8.75% / 33.75% / 39.35% based on total income band.

For the same £110,000 turnover outside IR35:

• Director salary: £12,570 gross (~£12,558 net after small NI)
• Corporation Tax on £97,430 profits: ~£22,069
• Distributable profit: ~£75,361
• Dividend tax on distribution (stacked on £12,570 salary): ~£15,840
• Net dividend: ~£59,521
• Take-home: ~£72,079

At this turnover the two are essentially tied — the 2024 reforms (NI cut to 8%/6%, Corporation Tax marginal at 26.5%) have eroded the outside-IR35 advantage that used to be £5–10k.

When does outside IR35 still win?

The gap is biggest at lower turnover where:

• Corporation Tax stays at the 19% small-profits rate (up to £50k profit).
• Dividend income stays in the basic-rate band.
• You can make meaningful employer-paid pension contributions from company profits (this alone can add £5–10k of annual tax relief).

At £60,000 turnover (£300/day × 200 days), outside IR35 typically beats inside by £3–5k/year post-CT. At £100k+ the advantage narrows to £1–2k.

Try our Contractor Calculator at your specific day rate to see the numbers.

The non-tax advantages of outside IR35

Beyond take-home, outside IR35 gives:

1. Employer pension contributions from company profits — huge tax efficiency for long-term savings.
2. Retained profits year-to-year — smooth income, fund equipment, build cash buffer.
3. Business expenses — a home office apportionment, professional training, travel to clients.
4. Company-owned assets — laptops, equipment.
5. Flat-Rate VAT scheme — typically £500–2,000/year saved.

These non-tax benefits are the real case for outside IR35 in 2025 — the pure income-tax saving is narrower than most contractors assume.

Practical advice

• Get a proper status review before starting. Don’t rely on CEST alone — specialist contractor accountants and IR35 review firms (Qdos, Markel, Kingsbridge) offer affordable written opinions.
• Insist on an SDS from medium/large clients. Challenge it if you believe it’s wrong — the statutory client-led dispute process can overturn blanket determinations.
• Contract + working practices both matter. A well-worded contract is necessary but not sufficient — the day-to-day reality has to match.
• Keep evidence of running a genuine business: multiple clients, professional indemnity insurance, website, LinkedIn as a business, etc.
• Umbrella companies are a middle-ground for inside-IR35 work — a PAYE route that still lets you work on multiple engagements without running your own company.

Common misconceptions

• “A ‘Limited’ company name means I’m outside IR35.” — No. Status depends on the nature of the engagement, not your company structure.
• “My contract says ‘outside IR35’ so I am.” — The contract helps but the working practices decide. HMRC looks at reality, not paperwork.
• “IR35 only affects 1-person contractors.” — IR35 applies anywhere an intermediary sits between the worker and the end client. Partnerships and personal service companies are caught equally.
• “If CEST says outside, I’m safe.” — CEST is HMRC’s tool but its output is only as good as the inputs. Get specialist advice for anything borderline.

Related tools

• Contractor Calculator — try your own day rate.
• Dividend Tax Calculator — the dividend component of outside-IR35 take-home.
• Self-Employed Calculator — for sole traders (not technically IR35 territory but often compared).
• Pension Auto-Enrolment guide — more on the employer pension contributions mentioned above.
• Methodology — how we verify contractor numbers against HMRC.