IR35 is the most important tax legislation affecting UK contractors and freelancers. It targets what HMRC calls disguised employment — situations where a contractor operates through a limited company but effectively works like an employee of their client.
- What IR35 tests
- Inside versus outside IR35
- Off-payroll working rules
What IR35 tests
The rules look at the substance of your working relationship. HMRC considers substitution — whether you can send someone else to do your work; control — whether your client directs what you do and how; and mutuality of obligation — whether there is an expectation of ongoing work.
Inside versus outside IR35
If you are inside IR35, you must pay income tax and National Insurance as if you were an employee. If you are outside, you can draw a small salary and take the rest as dividends, which are taxed more favourably.
Off-payroll working rules
Since April 2021, medium and large private sector businesses determine the IR35 status of contractors they engage. Always get a written contract that accurately reflects your working arrangements and consider using HMRC's CEST tool to check your status.
Bottom line
IR35 status can make a material difference to your take-home pay. If you operate through a limited company, understanding where you stand is essential. Consider a professional IR35 contract review from a specialist to protect your position.