IR35 rules explained: off-payroll working
IR35 takes its name from Inland Revenue press release number 35, issued on 9 March 1999, and the rules commenced on 6 April 2000 [1]. More than two decades on, the framework governs how a worker who supplies services through a limited company is taxed, and since 6 April 2026 it interacts with an employer National Insurance rate of 15% [2].
The purpose of the rules is narrow but consequential. They make sure that a worker who would have been an employee, but for the company sitting between them and the client, pays broadly the same Income Tax and National Insurance as a direct employee [3]. The rules do not stop anyone from contracting through a company. They decide who is responsible for the tax and how it is collected.
This article sets out what the off-payroll working rules are, who has to apply them, how employment status for tax is decided, and what happens to a contract found inside or outside the rules. It addresses employers, contractors, and the accountants who advise them, and reflects the position for the 2026-27 tax year.
Key takeaways
- IR35 exists to tax a worker who would otherwise be an employee at broadly employee rates, regardless of the company in between.
- Since 6 April 2021, medium and large private-sector clients decide the status of the contractors they engage, not the contractor's own company.
- A client is small, and therefore outside the reformed rules, if it meets two of three size tests. Those thresholds rose on 6 April 2025.
- A contract found inside the rules makes the fee-payer a deemed employer, responsible for deducting Income Tax and employee National Insurance and paying employer National Insurance at 15%.
- A contract found outside the rules is paid gross to the contractor's company, which stays responsible for its own tax.
What the off-payroll working rules are
The off-payroll working rules apply when a worker provides services to a client through an intermediary, and would have been an employee had they contracted directly with that client [4]. The intermediary is usually a limited company known as a personal service company, though it can also be a partnership or another individual [5].
The legislation has been consolidated in the Income Tax (Earnings and Pensions) Act 2003 and in the Social Security Contributions (Intermediaries) Regulations 2000 [6]. Two later reforms reshaped who carries the compliance burden. From 6 April 2017 the responsibility for public-sector engagements moved to the client, and from 6 April 2021 the same shift applied to medium and large private-sector clients [7].
The rules operate on a contract-by-contract basis. A worker may hold one engagement that falls inside the rules and another that falls outside, at the same time [8]. Each engagement is assessed on its own facts.
Who the rules apply to
The party that must apply the rules depends on the size and sector of the client. This is the first question in any off-payroll assessment, because it decides who is responsible for everything that follows.
The client size test
All public-sector clients must operate the reformed rules [9]. In the private and voluntary sectors, only medium and large clients carry the responsibility. A client is small, and therefore exempt, if it meets at least two of three conditions for two consecutive financial years [10].
From 6 April 2025, those size thresholds increased. The table below sets out the figures that define a small company, and therefore the boundary of the exemption.
| Size test | Threshold to 5 April 2025 | Threshold from 6 April 2025 |
|---|---|---|
| Annual turnover | Not more than £10.2 million | Not more than £15 million |
| Balance sheet total | Not more than £5.1 million | Not more than £7.5 million |
| Average number of employees | Not more than 50 | Not more than 50 |
The updated thresholds apply to financial years beginning on or after 6 April 2025, and for most engagers they take practical effect for off-payroll purposes from the tax year beginning 6 April 2027 [11]. Where a client qualifies as small, the responsibility for deciding status stays with the worker's own company [12].
Small clients and overseas clients
When the end client is small, the contractor's company applies the original form of the rules and decides its own status, exactly as it did before the reforms [13]. This preserves a meaningful distinction: a contractor working for a small firm carries a different set of obligations from one working for a large corporate client [14].
A client that is wholly overseas, with no UK connection, also falls outside the reformed rules, which again returns the responsibility to the worker's intermediary [15]. Getting this threshold question right matters, because a client that wrongly assumes it is exempt can find itself liable for tax it never deducted.
How employment status for tax is decided
Whether a contract sits inside or outside the rules turns on employment status for tax. That status is not a matter of job title or the presence of a limited company. It is decided by the terms of the engagement and the way the work is actually carried out [16].
The main status tests
Employment status rests on several factors weighed together, drawn from decades of case law. The most important are mutuality of obligation, control, and personal service.
Mutuality of obligation asks whether the client is obliged to offer work and pay for it, and whether the worker is obliged to do it personally, the arrangement often described as the wage-work bargain [17]. Control asks whether the client dictates how, when, and where the work is done, or whether the worker decides their own method [18]. Personal service asks whether the worker must do the job themselves or can send a genuine substitute, since a real and unfettered right of substitution points away from employment [19].
Other factors add weight, including financial risk, provision of equipment, and how far the worker is integrated into the client's organisation [20]. No single factor is decisive. A tribunal weighs the whole picture and reaches a view on the balance [21].
CEST and the status determination statement
HMRC provides a free online tool, Check Employment Status for Tax (CEST), which returns a view on whether the rules apply to a given engagement [22]. HMRC stands behind a CEST result, provided the information entered is accurate and matches the real working arrangement [23].
Where a medium or large client engages a contractor, it must issue a status determination statement, setting out its decision and the reasons for it, and take reasonable care in reaching that decision [24]. A CEST output is itself an example of a valid status determination statement [25]. Modern UK payroll software records these determinations against each engagement so the audit trail survives a later enquiry.
What happens inside the rules
When a contract falls inside the rules, the fee-payer becomes the deemed employer. It must calculate a deemed direct payment, deduct Income Tax and employee National Insurance through PAYE, and pay employer National Insurance at 15%, plus the Apprenticeship Levy where it applies [26]. Employer National Insurance cannot be taken out of the worker's deemed payment; it is an additional cost on top [27].
The deemed payment is then treated as employment income for tax, so the contractor's company receives the net figure and does not tax it again [28]. Because the deemed employer is running a real PAYE scheme, it needs HMRC-recognised payroll software that submits Real Time Information correctly. Accountants managing this across several clients typically rely on a payroll bureau platform that keeps each deemed-employment payroll separate.
What happens outside the rules
When a contract falls outside the rules, the client has determined that the worker would be self-employed for tax if engaged directly. The fee is paid gross to the worker's company, which stays responsible for its own Income Tax, National Insurance, and any student loan deductions under self-assessment [29].
Contractors who run a genuine business, work for a range of clients, use their own equipment, and carry real financial risk generally stay outside the scope of the rules [30]. The distinction is a question of substance, not paperwork, and the Moonworkers Instant Payslip Generator can produce a compliant record where an outside-scope worker still needs one.
Conclusion
The off-payroll working rules have travelled a long way from a single 1999 press release. Today they sit at the intersection of employment law, income tax, and National Insurance, and the reforms have made the client, rather than the contractor, the party that carries most of the risk. The technical questions have not changed, but the size of the mistake has, because a wrong determination now lands on a business with a payroll to run.
The direction of travel points towards tighter record-keeping and more automation. As employer National Insurance sits at 15% and status enquiries stay live, the engagers who cope best are those that decide status carefully, document each determination, and run any deemed-employment payroll through software built to keep the compliance plumbing correct.
Frequently asked questions
Does IR35 apply if the contractor works through a limited company for a small business?
When the end client is a small business in the private sector, the reformed rules do not apply to the client. Instead, the contractor's own company decides whether the engagement is inside or outside the rules and accounts for any tax due. A client is small if it meets two of three size tests, which from 6 April 2025 are turnover of not more than £15 million, a balance sheet total of not more than £7.5 million, and no more than 50 employees.
Who pays the tax when a contract is inside IR35?
The fee-payer, usually the client or an agency in the supply chain, becomes the deemed employer. It deducts Income Tax and employee National Insurance from the contractor's fee through PAYE and pays employer National Insurance at 15% on top. The contractor's company receives the net amount and does not tax the same income again.
Is a status determination statement legally required?
Yes, where a medium or large client engages a contractor through an intermediary. The client must give a status determination statement stating its decision and the reasons for it, and must take reasonable care in reaching that decision. Without a valid statement, the responsibility for the tax can remain with the client rather than passing down the supply chain.
Can the same contractor be inside IR35 on one contract and outside on another?
Yes. The rules are applied separately to each engagement, based on that engagement's own terms and working practices. A contractor can hold one contract that a client has determined is inside the rules and another, for a different client, that is outside, at the same time.
