What is IR35 and does it affect me?

IR35 (officially the Off-Payroll Working Rules) is the UK tax legislation that determines whether a contractor working through their own limited company is genuinely running a business, or whether they're effectively an employee dressed up as a company for tax purposes. The classification has major financial consequences for the contractor.

The 2021 reform. Before April 2021, contractors decided their own IR35 status, which led to widespread under-classification (most contractors said they were 'outside IR35' regardless of the reality). The 2021 reform shifted that determination to the end client (the company hiring the contract), with significant tax penalties if they get it wrong. The result: most large UK employers now default-classify all contractors as 'inside IR35' to avoid risk, regardless of the work's actual nature.

Inside IR35 vs outside IR35. Inside means you're treated for tax purposes as if you were an employee — full income tax and employee NI on the entire day rate, paid via the agency or umbrella company under PAYE, with no benefit from the limited-company tax structure. Outside means you're treated as a real business — you can pay yourself a small salary plus dividends, claim limited-company tax-deductible expenses, and the overall tax burden is meaningfully lower (typically 5-15% lower depending on rates and structure).

What determines the classification. Three main tests: control (does the client direct your day-to-day work, or are you genuinely autonomous?), substitution (can you send a substitute to do the work, or must it be you personally?), and mutuality of obligation (is the client obliged to provide work, and you obliged to accept it, beyond the specific contract?). Outside IR35 contracts genuinely look like business-to-business engagements: project-based, deliverable-focused, with the contractor controlling how the work is done.

Practical impact in 2026. The vast majority of corporate contracts are now inside IR35. If you're contracting at a FTSE 250 employer, your contract is almost certainly inside. The cases where outside IR35 still works: small clients (under £10m turnover, who aren't subject to the 2021 reform), genuinely project-based consultancy with multiple concurrent clients, specialist senior interim roles where the engagement is genuinely time-limited and outcome-defined.

If you're considering contracting. Ask the agency or end client upfront: 'is this contract inside or outside IR35?'. If inside, calculate the real take-home using a contractor calculator before deciding — the day rate that looks like £600 inside IR35 nets out roughly equivalent to a £75-85k permanent salary, sometimes less. If outside, verify the determination is genuine (some agencies advertise outside roles that are functionally inside, leaving the contractor with the tax risk if HMRC investigates).