What does inside IR35 mean? A plain-English answer
Inside IR35 means a contractor is treated as a deemed employee for tax, so Income Tax and National Insurance are deducted from the engagement fee before it is paid [1]. The off-payroll working rules that create this outcome raised an estimated £4.2 billion in extra tax up to the end of March 2023 [7]. This short guide answers the question directly and clears up the misconceptions that surround it.
Key takeaways
- Inside IR35 is a tax status, not an employment contract, and it applies to a single engagement [1].
- The fee-payer deducts Income Tax and employee National Insurance and pays employer National Insurance to HMRC [2].
- The contractor keeps their limited company; only the way that fee is taxed changes [4].
- Being inside does not bring employment rights such as holiday pay or redundancy [4].
The short answer
The off-payroll working rules make a worker who supplies services through their own company pay broadly the same Income Tax and National Insurance as a directly engaged employee [1]. Inside IR35 is the outcome when the client decides that, stripped of the company in the middle, the worker would be an employee for tax [1].
Once that decision is made, the worker is a deemed employee and the fee for the engagement is subject to PAYE [1]. The determination rests on the working reality, judged mainly on control, personal service and mutuality of obligation, rather than on what the contract is called [9]. The opposite outcome is explained in the companion guide to what outside IR35 means.
What changes in practice
The clearest way to see what inside IR35 means is to look at what happens to the money. The party immediately above the worker's intermediary, the fee-payer, deducts tax at source and reports it to HMRC through Real Time Information, just as it would for any employee [2].
| What happens to the engagement fee | Inside IR35 |
|---|---|
| Income Tax and employee National Insurance | Deducted before the fee is paid [[2]](https://www.gov.uk/guidance/fee-payer-responsibilities-under-the-off-payroll-working-rules) |
| Employer National Insurance | Paid by the fee-payer on top, at 15% for 2026-27 [[15]](https://www.gov.uk/guidance/rates-and-thresholds-for-employers-2026-to-2027) |
| Reporting to HMRC | Full Payment Submission with the off-payroll indicator [[2]](https://www.gov.uk/guidance/fee-payer-responsibilities-under-the-off-payroll-working-rules) |
| The contractor's limited company | Kept, but the engagement fee is already taxed [[4]](https://www.gov.uk/government/publications/off-payroll-working-rules-communication-resources/know-the-facts-for-contractors-off-payroll-working-rules-ir35) |
Employer National Insurance cannot be deducted from the worker's fee; the fee-payer bears it separately [2]. Businesses that run deemed employment through HMRC-recognised payroll software apply the off-payroll indicator automatically, and platforms that embed payroll do the same through an HMRC-recognised payroll API. The full mechanics, including who decides status, sit in the guide to inside IR35 meaning and the wider overview of IR35 and off-payroll working.
Conclusion
What does inside IR35 mean? In practice, it means the tax that would normally be the contractor's own responsibility is instead taken off the engagement fee at source, because the working arrangement looks like employment. The company stays, the employment rights do not appear, and the status applies to that engagement alone. For any contractor or client unsure of the answer, the safest step is to check the working arrangement against HMRC's status factors before the first invoice is raised.
Frequently asked questions
What does inside IR35 mean for how much a contractor takes home?
It means Income Tax and employee National Insurance are deducted from the engagement fee before the contractor's company receives it, so take-home from that contract is lower than if it were outside IR35 [2]. The contractor no longer settles that tax later through Self Assessment for the engagement, because it has already been paid at source [1].
Does inside IR35 mean the contractor is an employee?
No. Inside IR35 is a status for tax and National Insurance only, so the worker is a deemed employee for those purposes but not a full employee [1]. It does not grant employment rights such as holiday pay, sick pay or redundancy, and the contractor keeps their own limited company [4].
Who decides whether an engagement is inside IR35?
For a public-sector client, or a medium or large private-sector client, the client decides and must issue a status determination statement with reasons [3]. Where the end client is small, the worker's own intermediary decides instead [1]. HMRC's Check Employment Status for Tax tool can support that decision [11].
Can an inside IR35 decision be wrong?
It can, and the consequences fall on the client or fee-payer. HMRC expects reasonable care in reaching a determination and publishes a specific method for calculating the PAYE due where the rules are applied incorrectly [14]. A worker who disagrees can challenge the determination, and the client must respond within 45 days [3].
