IR35 explained: does it affect your limited company?

IR35 has been a thorn in the side of limited companies that provide professional services since April 2000.

The financial consequences if your work is caught by this tax rule are significant.

In this concise guide, we explain IR35 and how to assess whether a particular engagement falls inside or outside its scope.

We also examine the ‘Off-Payroll’ rules, which are separate but related legislation and – confusingly – are also referred to as ‘IR35’.

Why was IR35 implemented?

From the late 1980s onwards, the IT industry saw a boom in the number of professionals opting to work via their own limited companies as ‘contractors’ rather than as payroll employees.

As the numbers increased, HMRC believed that many of these new company directors were, in fact, ‘disguised employees’ rather than bona fide small business people.

Many would work 9-5 for an employer one day, only to return the next day as limited company contractors, performing exactly the same work.

If you work via your own company rather than staying in traditional employment, you will pay less overall tax.

This is mainly because National Insurance Contributions (NICs) are not payable on dividends.

The differential is smaller than in the late 1990s, thanks to the 2016 dividend tax hike and more recent corporation tax rise.

However, it is still beneficial (tax-wise) to be a contractor rather than a traditional employee.

In response to the huge growth in the number of so-called ‘personal services companies,’ the government implemented the Intermediaries Legislation (IR35) on April 6th, 2000.

These rules were created to combat what it saw as widespread avoidance of tax and NICs by disguised employees. The legislation is contained within Chapter 8 of ITEPA 2003.

The term ‘IR35’ originates from the number of the press release which first detailed HMRC’s planned clampdown.

What are the IR35 rules exactly?

In essence, if you undertake a contract role, and the terms of the contract and the way you perform the role are more akin to those of a normal employee than a ‘self-employed’ person, then that particular contract would be subject to IR35.

Under the original Chapter 8 IR35 rules, after allowing a fixed 5% allowance to meet your company’s running costs, the remaining relevant contract revenue is subject to the deemed employment payment calculation and employment taxes (NICs and income tax).

If a contract is deemed to be caught by IR35, its net return can be significantly reduced. The precise impact depends on your circumstances.

* The 5% allowance applies under Chapter 8 and does not apply where the Chapter 10 Off-Payroll rules apply.

2017, 2021 – the ‘Off Payroll’ rules are introduced

In April 2017, following concern that disguised employment was rife in state-run organisations, a new piece of legislation – ‘Off-Payroll’ working – was created.

This legislation is contained within Chapter 10 of ITEPA 2003.

According to HMRC:

…this measure moves responsibility for deciding if the off-payroll rules for engagements in the public sector apply, from an individual worker’s PSC to the public sector body, agency or third party paying them.

The new rules forced clients to decide whether workers were subject to IR35. Therefore, the onus for determining employment status switched away from workers themselves.

The fee-payer in the employment chain is responsible for deducting employment taxes from the worker’s income where the Chapter 10 rules apply.

Following a COVID-related delay, the off-Payroll rules hit the private sector from April 2021 onwards.

This led to a dramatic drop in the number of limited company contractors working for end clients.

Small private-sector clients are exempt from the Chapter 10 rules, so the original Chapter 8 IR35 rules continue to apply and the worker’s intermediary remains responsible for determining IR35 status. Public-sector engagements are subject to Chapter 10 regardless of the organisation’s size.

The Companies Act small company thresholds were increased for financial years beginning on or after 6 April 2025. Broadly, a company qualifies as small if it meets at least two of these three conditions: turnover of no more than £15 million, a balance sheet total of no more than £7.5 million, and no more than 50 employees. There are additional rules for groups and for determining when a change in company size takes effect for Off-Payroll purposes.

Many risk-averse clients have opted to blanket ban limited company workers due to the compliance risks associated with the rules. Unfortunately, many blanket bans (particularly in the City) remain in place today (2026).

Off-Payroll repealed – and then reinstated – in 2023

Dramatically, on September 23rd 2022, Chancellor Kwasi Kwarteng announced that the Off-Payroll rules would be abolished in April 2023.

However, new Chancellor Jeremy Hunt cancelled the repeal on October 17th 2022.

So, things remain as they are for now.

How do you know if your work is caught by IR35?

In the event of a tax investigation by HMRC, the terms of your written contract and your working conditions will be examined to provide an overall picture of the true nature of your work.

Some of the main factors considered include:

• Control – to what extent is the contractor under the direct control and supervision of the end-client?
• Substitution – can the contractor provide a substitute if they cannot perform their contractual duties?
• Mutuality of Obligation – when the current fixed-term contract period has expired, is there a reasonable expectation of a renewal?

Even if these factors are concisely addressed in the written contract, they must also reflect how you work.

Read more about IR35 on our IR35 Update microsite – lots of in-depth guides.

How can I protect myself against IR35?

This all depends on your contract status.

1) Contracting with a small company client: you determine your IR35 status

If you are a contractor with a small private-sector client, the Chapter 8 rules generally apply and your intermediary remains responsible for determining your IR35 status.

In this case, you should follow these steps to protect yourself:

• Have your contracts reviewed by an IR35 specialist – they can review both the wording of the contracts and your working practices and provide an opinion on your IR35 status.
• Show that you are truly ‘self-employed’ – see the ‘control’, ‘mutuality of obligation’ and ‘substitution’ factors listed above.
• Take out IR35 insurance – consider tax investigation insurance, which can cover eligible legal and professional fees in the event of an HMRC investigation. Some policies also provide cover for IR35 tax liabilities, subject to the policy terms and limits.

2) Working outside IR35 for a large company: the client holds the liability

If you contract for a medium or large private-sector company, the client determines your IR35 status under the Off-Payroll rules.

If the client states that your role is outside IR35, you should still take steps to protect yourself:

• Make sure your client provides you with a Status Determination Statement (SDS) – this states your IR35 status, and the reasoning behind it.
• Maintain ‘self-employed’ working practices – work independently, avoid employee-like benefits, and ensure the wording of your contract matches your working conditions.
• Monitor the client’s IR35 compliance – clients are notoriously risk-averse regarding IR35, and could reassess roles (even at renewal time).

3) Working inside IR35 via your limited company

If the client allows you to contract via your limited company (on an inside basis), you can take some steps to improve your position.

• Negotiate better contract terms: If possible, seek higher rates to offset your increased inside IR35 tax liability.
• Consider working through an umbrella company. This may be a hassle-free option compared to maintaining your company. You can also keep your company active while working for an umbrella company.
• Make sure the correct deductions are made: Under Chapter 10, the fee-payer (usually the client or agency responsible for paying your company) operates PAYE and deducts the relevant employee National Insurance before paying your company. You will need an IR35-aware accountant to double-check the accounting and tax treatment.

4) Working as an umbrella employee: IR35 does not apply

You may choose to contract via an umbrella company. Or – as is often the case – you take on an ‘inside IR35’ role, and the client has a no-limited company policy, so you’re forced to go down the umbrella route.

If you work through an umbrella company, IR35 is not a concern for that engagement because you are already taxed as an employee through PAYE. However, you should still take steps to protect your earnings and employment rights:

• Choose a reputable umbrella company: Ensure your provider is a UK-based, FCSA-accredited PAYE umbrella company. Avoid offshore or disguised remuneration schemes.
• Understand your deductions: Check what fees and deductions are taken from your pay. Unscrupulous umbrellas have been known to ‘skim’ employees’ pay.
• Check your employment rights: As an umbrella employee, you should receive statutory benefits, including holiday pay, sick pay, and pension contributions.

Is IR35 insurance still necessary?

IR35 insurance can cover eligible professional representation costs during an HMRC investigation.

You may also take out a more comprehensive policy which provides cover for certain IR35 tax liabilities, interest and penalties, subject to the policy’s terms, exclusions and indemnity limit.

Since the introduction of the off-payroll rules, end-clients generally determine IR35 status for Chapter 10 engagements, with the fee-payer normally responsible for operating PAYE where the rules apply. As a result, IR35 insurance is particularly relevant to Chapter 8 engagements and historic periods where your company carried the IR35 risk.

It is worth considering in the following scenarios.

• You work for a small private-sector client and your intermediary determines the engagement’s IR35 status.
• You have a mix of ‘inside’ and ‘outside’ IR35 contracts.
• You’ve worked outside IR35 under Chapter 8 in the past. HMRC’s normal assessing time limit is generally 4 years, extending to 6 years for careless behaviour and potentially 20 years in certain circumstances.
• You want continuing protection for historic engagements, subject to the insurer’s policy terms. Many IR35 policies operate on a claims-made basis, so check what happens if you allow the policy to lapse.

The leading provider for contract reviews and IR35 insurance is Qdos.