Before you sign your first contract through a limited company, you need to know whether IR35 applies to it. IR35 is the name for the off-payroll working rules. They exist so that a contractor who would have been an employee if engaged directly pays broadly the same Income Tax and National Insurance as an employee. For most medium and large clients, the client decides your status and must give you a Status Determination Statement (SDS) explaining the decision. For small clients, the decision is yours.
The decision matters because it is made contract by contract and changes how much of your fee you keep. This guide explains who decides, how they decide, what inside and outside mean for your pay, and what to do before you sign.
What IR35 is and why it exists
HMRC's guidance on GOV.UK puts it simply: the off-payroll working rules make sure that a worker pays broadly the same Income Tax and National Insurance as an employee would. They apply when the worker provides services through their own intermediary and would have been an employee if they had provided those services directly to the client. The rules are sometimes known as IR35.
The name is a historical accident. The legislation was introduced in April 2000 to tackle "disguised employment", and it was announced in Inland Revenue press release number 35. The concern was that two people could do the same work for the same organisation, but one was an employee and the other worked through a company, took a low salary and drew the rest as dividends. That arrangement attracted neither employer nor employee National Insurance.
In practice, "IR35" now covers two sets of rules in the Income Tax (Earnings and Pensions) Act 2003:
- Chapter 8: the original rules, where the contractor's own company decides whether the engagement is inside or outside.
- Chapter 10: the newer off-payroll working rules, which move the decision to the client or agency. These applied first in the public sector from 6 April 2017 and then to medium and large private sector clients from 6 April 2021.
Under both, the core question is the same: would you be an employee if your company did not exist?
Who IR35 applies to
The rules apply if you provide services to a client through your own intermediary. Usually that is a limited company, known as a personal service company (PSC). GOV.UK notes that a PSC is not defined in law. It is typically a limited company that the worker controls and has some interest in. An intermediary can also be a partnership or another individual.
Three parties can be affected:
- the worker providing services through an intermediary
- the client (also called the engager, hirer or end client), who receives the services
- an agency or other supplier in the chain
Two groups sit outside the rules in the usual sense. GOV.UK says the off-payroll working rules are unlikely to apply if you are employed by an umbrella company. And if you are a sole trader with no company, the PSC structure the rules are built around is not there. That does not settle your status. HMRC can still look at whether you are genuinely self-employed.
The rules apply on a contract-by-contract basis. GOV.UK confirms a contract can be written, verbal or implied. You may have one contract inside the rules and another outside them, even with the same client.
Who decides your status
This depends on who the client is.
| Client | Who decides status | What you should receive |
|---|---|---|
| Public sector body (any size) | The client | An SDS with reasons |
| Medium or large private sector client | The client | An SDS with reasons, before the contract starts |
| Small private sector client | You, through your company | Nothing from the client; you keep your own evidence |
GOV.UK states it directly: in most cases the client is responsible for determining the worker's employment status. If a worker provides services to a small client outside the public sector, the worker's intermediary decides whether the rules apply.
Where the client decides, it should produce an SDS that includes the reasons for its determination. The client must pass it to you and to any agency in the chain. BDO, advising businesses on their side of the rules, says the client must give the SDS to the worker's PSC and any intermediary, with the outcome and the basis of the decision. The client must also have an appeal process.
The fee-payer
If an agency sits between you and the end client, the party that deducts tax is not always the client. The fee-payer is the party in the chain closest to, and responsible for paying, your company. On a direct engagement, that is the client. In a chain with agencies, it is the agency closest to your company. If you are inside IR35, the fee-payer deducts the tax before paying your company.
Disputing an SDS
You are allowed to disagree. If you think the SDS does not match the contract or how you will actually work, you can ask the client for its reasons and raise a formal dispute. The client must consider your objection and respond within 45 days, either explaining its decision or indicating a change.
If a medium or large client never issues an SDS at all, that is a breach of the rules, and the client may become liable for the tax. The more practical point for a new contractor is that you should not sign without one. Ask for it early and read the reasoning, not only the headline.
How status is assessed
Status does not depend on what the contract is called, or on the fact that you have a limited company. A limited company does not make you outside IR35. The assessment looks at the written terms and at how the work is done in practice.
The test is built around a hypothetical contract: if you were engaged directly by the end client, with no company or agency in between, would the relationship look like employment or self-employment? Self-employment means outside IR35. Employment means inside.
Three factors carry most weight, and none is decisive alone.
Control. Who decides what work is done, and how, when and where it is done? A client can still say what it wants delivered. The question is whether it directs how you go about it.
Personal service and substitution. If the client needs you personally and you cannot send someone else, that points towards employment. A genuine right to send a suitably qualified substitute points the other way. The word is genuine. A substitution clause that exists only on paper and could never realistically be used carries little weight.
Mutuality of obligation. Is the client obliged to keep offering you work, and are you obliged to accept it? An employment relationship has that ongoing obligation. A genuine contractor relationship may involve a defined piece of work, after which both sides are free to part.
Other indicators matter too. BDO lists the nature and length of the engagement (permanent rather than a discrete piece of work), being restricted from working for others, who bears the financial risk, and whether you are integrated into the client's organisation, for example by having line management responsibilities or the same benefits as permanent staff. Providing your own equipment and taking financial risk count in your favour.
HMRC's CEST tool
HMRC provides the Check Employment Status for Tax (CEST) tool. It gives HMRC's view of employment status based on what you enter. HMRC says it will stand by the results as long as the information you give remains accurate and in line with its guidance. Anyone can use it: hirers, workers and agencies. A saved result can be used as a valid SDS.
Two cautions follow from that:
- The result is only as good as the answers. Inaccurate or incomplete answers can produce a wrong result, and the client should keep records showing how it reached the outcome.
- You need to know the facts first: the contract details, your responsibilities, who decides what work is done and when, where and how, how you are paid, and whether there are benefits or expenses.
If a client tells you its CEST result puts you inside, ask what answers it entered. If those answers do not match how you will actually work, say so in writing.
Inside and outside IR35: what changes
Inside IR35 means the engagement is treated as employment for tax purposes. Outside IR35 means it is treated as a genuine business-to-business arrangement.
| Inside IR35 | Outside IR35 | |
|---|---|---|
| Tax status for this contract | Employed for tax purposes | Self-employed for tax purposes |
| Who deducts tax | The fee-payer deducts Income Tax and employee National Insurance before paying your company | Your company receives the fee gross |
| Employer National Insurance and Apprenticeship Levy | Paid to HMRC by the deemed employer (the Apprenticeship Levy where applicable) | Off-payroll rules do not apply |
| Dividends | Cannot be used to take this income | Available as normal |
| Expenses | Travel and subsistence may not be claimable | Business expenses available |
Being inside does not make you the client's employee in every legal sense, and your company does not stop existing. The income from that engagement simply gets employment tax treatment.
What it does to take-home pay
There is no single figure for the difference. It depends on your rate, expenses, pension contributions, company running costs and how you take money from the company.
To show the shape of it, the accountancy firm GNS Associates works an example of £600 a day over 220 days, a contract value of £132,000. On its approximate figures, take-home inside IR35 is £78,000 to £82,000. Outside, taking a salary plus dividends through the company, it is £93,000 to £98,000. That is a gap of roughly £13,000 to £18,000 a year. Treat those as an illustration of scale, not a quote. Your own numbers will move with your circumstances, and the salary and dividend mix is worth modelling. We cover that in salary and dividends for contractors in 2026-27.
Two mechanical points catch new contractors out.
The 5% allowance is gone for client-decided contracts. Under the original Chapter 8 calculation, a contractor took a 5% flat-rate deduction from fee income for running costs, then claimed employee-type deductions and pension contributions on the remaining 95%, before PAYE and National Insurance were applied. Under Chapter 10, that 5% deduction is lost. Your company receives the net amount after tax. Over a full tax year, you will have no profit left to set expenses against, so running costs effectively come out of your own pocket.
Student loan repayments are not deducted. GOV.UK's guidance was updated in February 2026 to say so. Deemed employers do not deduct student or postgraduate loan repayments from fees paid to an off-payroll worker. You must register for Self Assessment, report the income and pay those repayments yourself. If you have a loan, budget for it.
Is outside always better?
On pay, usually yes. But the status has to be right. Being treated as outside when the facts say inside is the expensive outcome, not the cheap one. If HMRC finds that the wrong status was applied, it can pursue unpaid PAYE and National Insurance, interest and penalties for careless or deliberate non-compliance. Liability generally falls on whoever was responsible for the determination: the client on medium and large engagements, or your own company on small-client ones.
An accurate inside decision is a lower rate of take-home than you wanted, but it is not a debt. Many contractors accept inside contracts at a higher day rate, or switch to an umbrella company for short ones. What goes wrong is an outside status that does not survive scrutiny.
The small-client exemption
If your client is a small private sector business, the Chapter 10 rules do not apply and your own company remains responsible for assessing status, under the original rules. A company is small if it meets at least two of these three tests, which come from the Companies Act 2006:
- annual turnover under £10.2 million
- balance sheet total under £5.1 million
- fewer than 50 employees
A client should confirm its size in writing if asked. In the other direction, GOV.UK points out that the size rules apply only to clients. Agencies of any size have responsibilities under the rules, and the public sector has no small-body exemption. The same original rules also apply where the client is based wholly overseas with no UK presence.
This exemption gives you the decision, not the answer. You still need to apply the same tests honestly and keep evidence of how you reached your conclusion. If HMRC later challenges the status, the liability is your company's.
Why some clients refuse limited companies
Expect this in your first round of enquiries. A client that makes the wrong call can be held liable for the unpaid tax, so many protect themselves in one of three ways:
- refusing to work with PSCs at all
- deeming every contract inside IR35, whatever the individual circumstances
- engaging workers only through umbrella companies
It is a risk-management policy, not a verdict on you. A blanket approach applied without assessing the individual engagement is not what the rules ask for. If your actual working pattern looks nothing like the determination, query it formally rather than accepting it. If the client will not move, you can decide on price. It is sensible to quote different rates for an inside and an outside engagement.
One practical limit: most clients will not let you switch between an umbrella company and your own limited company halfway through an assignment. You can change structure between contracts, not within one.
What to do before you sign
- Find out the client's size and who decides. If it is medium, large or public sector, the client decides. If it is small, you do.
- Ask for the SDS before the contract starts. Read the reasons, not just the conclusion.
- Check the contract against reality. If the contract says you can send a substitute but nobody expects you to, or says you control your hours when the client sets them, the paperwork will not protect you. Working practices must match what is written, and the other way round.
- Challenge a wrong determination in writing. You can ask why you have been put inside, and the client must respond within 45 days.
- Keep records. Keep the contract, correspondence, invoices, the SDS and anything showing how the engagement really ran. If you use a substitute, document it. If your working practices change substantially, the original assessment may no longer hold. BDO notes that clients must reassess when contract terms or practical arrangements change.
- Treat each contract separately. Being outside on one contract says nothing about the next, even with the same client.
- Ignore schemes that promise to get around the rules. GOV.UK warns that some wrongly claim to do so.
For a contract with real money riding on it, take advice before signing. You do not need an accountant by law, but a company running through IR35 has more to track than most: Corporation Tax, PAYE, dividends, expenses, VAT and Self Assessment all sit behind the status question. If you are comparing costs, our guide to contractor accountant fees sets out what to expect.
Frequently Asked Questions
Does having a limited company mean I am outside IR35?
No. The company structure is only part of the picture. What matters is the relationship with the client and how the work is done.
Can I challenge an inside decision?
Yes. Ask the client for its reasons and raise a formal dispute. The client must consider your objection and respond within 45 days.
What if my client never gives me an SDS?
A medium or large client must issue one before the contract begins. If it does not, it is in breach of the rules and may become liable for the tax. Ask for it before you start work.
Does IR35 apply if I work through an umbrella company?
GOV.UK says the off-payroll working rules are unlikely to apply if you are employed by an umbrella company. The umbrella operates PAYE on your pay.
Does working remotely or for several clients keep me outside?
Not automatically. Working from home may give you more control over how you work, but it does not override substitution or mutuality of obligation. Having more than one client helps, but a single dominant client with the same control characteristics can still put you inside.
Where Deplexify fits
If you are setting up as a contractor and want the accounts and tax handled by someone who works with contractors, see Deplexify's accounting for UK contractors.
Sources
- Understanding off-payroll working (IR35) - GOV.UK — gov.uk, read 2026-10-18
- Check employment status for tax (CEST) - GOV.UK — gov.uk, read 2026-10-18
- What is IR35? A Guide To The Off-Payroll Rules And Reforms — kingsbridge.co.uk, read 2026-10-18
- What does Inside IR35 mean? — contractoruk.com, read 2026-10-18
- What is IR35? - Guide for UK limited company owners and contractors — bytestart.co.uk, read 2026-10-18
- What is IR35? A plain English guide for contractors (2026) - 99p Company Formations UK — 99pcompanyformations.co.uk, read 2026-10-18
- Inside IR35 vs Outside IR35 Explained - GNS — gnsassociates.co.uk, read 2026-10-18
- IR35 | A Guide for Businesses - BDO — bdo.co.uk, read 2026-10-18
- 12 key points for contractors and Off-Payroll (IR35) | IR35 Shield — ir35shield.co.uk, read 2026-10-18
- A Contractor’s Guide to IR35 - Part 1 — markeluk.com, read 2026-10-18