UK Contract Type Guide · 2026
How do UK IR35 rules work in 2026?
Definition
IR35 (in income tax law: Chapter 8 ITEPA 2003 for small clients, Chapter 10 ITEPA 2003 for medium/large clients) is the regime that taxes disguised employment as employment for tax purposes — even when arranged through a personal service company (PSC, typically a one-person ltd company). Determines whether a contractor genuinely operates as a business or is effectively an employee.
Rights and protections
Important: IR35 is a TAX rule, not an employment rights rule. Even if you're 'inside IR35' for tax, you generally don't gain employment rights — you remain a contractor for employment law purposes. Some pushback in courts (e.g., Pimlico Plumbers) has extended worker rights to those substantively integrated, but tax status doesn't automatically confer employment rights. Always check whether contracts contain termination provisions, IP, expenses, etc.
Employer obligations
Medium/large end clients (since April 2021) must: (1) issue Status Determination Statement (SDS) before payments start; (2) take reasonable care; (3) provide reasoning; (4) operate dispute resolution if challenged; (5) operate PAYE on payments to PSCs determined as 'inside IR35'. Small clients (turnover <£10.2M, fewer than 50 employees, balance sheet <£5.1M — meeting 2 of 3) — the contractor still self-determines status under the original 2000 IR35 rules.
Tax and pay implications
INSIDE IR35: payments treated as deemed employment income — PAYE + NI deducted before payment to PSC; PSC then distributes after-tax income to contractor as net pay. Significantly higher tax burden than outside IR35. OUTSIDE IR35: PSC pays contractor as director/employee (small salary at threshold) and dividends (taxed at lower dividend rates); business expenses deductible; more flexibility. April 2024 offset change: HMRC must give credit for tax already paid by contractor when reassessing determinations — fixed a long-standing double-taxation issue.
Common use cases
OUTSIDE IR35: genuine contractors with multiple clients, project-based work, ability to substitute, own equipment, financial risk; specialist consultants in IT, finance, engineering. INSIDE IR35: long-term single-client engagements, fixed hours, employer control, no substitution rights — basically disguised employment.
Worked example
Aisha contracted via her ltd company at a fintech for 18 months at £600/day. The fintech (medium-large company) issued an SDS determining 'inside IR35' citing her fixed working hours, single-client concentration, and lack of substitution rights. The fintech operated PAYE on her £600/day rate before paying her ltd company. She received roughly 60% of gross instead of the ~85% she'd have received outside IR35. She challenged the determination through dispute resolution but the SDS stood. She ultimately moved to a genuinely outside-IR35 engagement (multiple clients, substitution clauses, project-based) where her effective take-home was 25% higher.
Recruiter pro tip
The single biggest IR35 leverage point is the contract structure and working practices BEFORE you start, not the SDS afterwards. To be genuinely outside IR35: ensure contractual right to substitute, lack of mutuality of obligation, no fixed working hours, control of how/when work is done, financial risk, multiple clients where possible. End clients who issue blanket 'inside IR35' SDS to avoid risk are increasingly losing contractors to alternative engagements where status is properly assessed. Push for a Status Determination Statement that reflects reality — and walk away if the engagement is mischaracterised.
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