IR35, officially the off-payroll working rules, makes sure a contractor who works through their own limited company pays broadly the same Income Tax and National Insurance as an employee would, if they'd be an employee when working directly for that client. Whether the client or the contractor decides depends mainly on the client's size and sector.
If you're a contractor with a personal service company, or a business that hires them, the question isn't whether IR35 exists; it's whose job the decision is and who pays if it's wrong. HMRC's guidance is clear on both, and there's a threshold change working its way through that will move some clients out of scope from the 2027 to 2028 tax year.
Who IR35 applies to
HMRC says you may be affected if you're a worker providing services through your own intermediary, a client receiving those services, or an agency in the chain. The intermediary is usually a limited company, known as a personal service company (PSC), but it can also be a partnership or another individual. HMRC says the rules are unlikely to apply if you're employed by an umbrella company.
Who decides: client or contractor?
| Client type | Who decides employment status for tax |
|---|---|
| Public sector client | The client |
| Medium or large private or voluntary sector client | The client, with a status determination statement (SDS) |
| Small private or voluntary sector client | The worker's own intermediary (their PSC) |
When the client decides, HMRC says it should produce an SDS with the reasons. If the worker or deemed employer disagrees, the client must respond within 45 days; if it doesn't, HMRC says the worker's Income Tax and National Insurance become the client's responsibility. The rules apply contract by contract, so one contractor can have some contracts inside IR35 and others outside.
The small client test, and the change coming
Here's the detail most guides haven't caught up with. As of October 2026, HMRC's client guidance says a private or voluntary sector company is medium or large if it meets 2 or more of: turnover over £10.2 million, balance sheet total over £5.1 million, more than 50 employees. But HMRC's Employment Status Manual (ESM10006A) says that from 6 April 2025 two of those Companies Act thresholds rose, for financial years beginning on or after that date, to turnover over £15 million and a balance sheet over £7.5 million. The 50 employee limit stays the same.
Because a company has to meet the test for two consecutive financial years and filing deadlines come into it, ESM10006A says the earliest tax year the new thresholds can affect a client is 2027 to 2028. So a business sitting between the old and new figures may still be a medium client for IR35 today and drop to small later, which hands the decision back to its contractors.
What happens if the rules apply
- The party responsible decides whether the worker is employed for tax purposes, often using HMRC's Check Employment Status for Tax (CEST) tool.
- If the worker is deemed employed, the deemed employer deducts Income Tax and employee National Insurance from the fees paid to the worker's intermediary.
- The deemed employer also pays employer National Insurance and Apprenticeship Levy where it applies.
- Student and postgraduate loan repayments aren't deducted from those fees; HMRC says the worker must register for Self Assessment and pay them through a tax return.
That last point was added to HMRC's guidance in February 2026, and it catches contractors out. If you're inside IR35 with a student loan, you'll need to file a return; my guide on whether you need to do a Self Assessment covers the trigger.
Taking reasonable care
Clients that decide status must take reasonable care. HMRC's manual gives examples of what that looks like, such as using CEST accurately, applying the employment status principles, involving someone who understands the work and redoing a determination when terms change. It also lists what isn't reasonable care, including deciding that every contractor is caught without looking at each case, or entering inaccurate information into CEST. A blanket inside IR35 policy is the shortcut HMRC specifically calls out.
Contractors also need to watch the VAT threshold, which our UK VAT threshold guide explains.
Before you sign a contract
- Ask whether the client is public sector, medium or large, or small for IR35.
- If the client decides, ask for the SDS and read the reasons.
- If you disagree, put it in writing; the client has 45 days to respond.
- If you're outside IR35, make sure the way you work matches the contract, not just the wording.
- Keep each contract's determination on file, because status can differ between contracts.
If you're still deciding how to set yourself up, sole trader versus limited company walks through the trade-off, because IR35 only bites when you work through an intermediary.
My verdict
For contractors, IR35 is mostly a question of who your client is: work out their size first, because that tells you who makes the call. For small business clients, IR35 is your contractor's decision today, but check your size each year against the higher thresholds. And whichever side you're on, decide each contract on its own facts; a blanket answer is exactly what HMRC treats as a lack of reasonable care.
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Running your own limited company with staff? See our Employment Allowance guide for the National Insurance allowance, including the one-director catch.
Frequently asked questions
What is IR35?
IR35 is the common name for the off-payroll working rules. HMRC says they make sure a worker who provides services through their own intermediary pays broadly the same Income Tax and National Insurance as an employee would.
Who decides IR35 status?
Public sector clients and medium or large private sector clients decide. If the client is small and outside the public sector, the worker's intermediary decides, according to HMRC.
What makes a company small for IR35?
HMRC's client guidance says a company is medium or large if it meets 2 or more of: turnover over £10.2 million, balance sheet over £5.1 million, more than 50 employees. HMRC's manual says two of those thresholds rose to £15 million and £7.5 million for financial years beginning on or after 6 April 2025, affecting IR35 from the 2027 to 2028 tax year at the earliest.
Does IR35 apply to umbrella company workers?
HMRC says the off-payroll working rules are unlikely to apply if you're employed by an umbrella company.
How long does a client have to answer an IR35 disagreement?
45 days. HMRC says failure to respond within 45 days makes the worker's Income Tax and National Insurance the client's responsibility.
Are student loan repayments deducted under IR35?
No. HMRC says deemed employers don't deduct student or postgraduate loan repayments, so the worker must register for Self Assessment and pay them through a tax return.
Does IR35 apply to sole traders?
The rules apply when a worker provides services through their own intermediary, such as a limited company. A sole trader working directly for a client isn't using an intermediary.
