IR35 decides whether your limited company contract is taxed like a business or like a job. Get the determination wrong, or accept an inside contract at an outside rate, and the same day rate can cost you thousands a year. This guide explains inside vs outside in plain English, who decides your status in 2026/27, and what a £500 day rate actually pays under each outcome.
Search intent: you want to know what IR35 means for your contract, who decides whether you are inside or outside, and how much take-home pay is at stake. All three are answered below, with a full worked example. Rates last reviewed: October 2026, for the 2026/27 tax year (6 April 2026 to 5 April 2027), England, Wales and Northern Ireland rates.
What is IR35?
IR35 is UK tax legislation, formally the intermediaries legislation and the off-payroll working rules, that taxes a contractor working through their own limited company as an employee when the underlying relationship with the client would be employment if the company did not exist. HMRC looks past the company to the real working relationship underneath it.
The rules sit in Part 2 of the Income Tax (Earnings and Pensions) Act 2003. Chapter 8 covers the original intermediaries rules, which still apply when your client is small. Chapter 10 covers the off-payroll working rules, which apply when your client is a public sector body or a medium or large private company. HMRC’s own guidance on the rules is at GOV.UK, understanding off-payroll working (IR35).
Two points contractors often miss. First, status is decided contract by contract, so you can be outside IR35 for one client and inside for the next. Second, IR35 is only about tax and National Insurance. An inside determination makes you an employee for tax purposes only. It gives you no employment rights: no holiday pay, no sick pay, no notice period and no pension from the client.
What is the difference between inside and outside IR35?
Outside IR35, your company is genuinely in business: it invoices the client, pays corporation tax on its profit, and pays you a small salary plus dividends. Inside IR35, the engagement is taxed as employment: income tax and Class 1 National Insurance are deducted from the contract income as if you were on the client’s payroll.
Once you are outside IR35, our salary vs dividends guide shows the tax-efficient mix to draw from your company in 2026/27.
| Feature | Outside IR35 | Inside IR35 |
|---|---|---|
| How your company is paid | Gross, against your invoice | Tax and employee NI deducted by the fee-payer first |
| How you take money out | Low salary plus dividends | Mostly taxed as employment income at source |
| Employer NI and apprenticeship levy | Only on your small director’s salary | Charged on the contract value, usually priced into the rate |
| Corporation tax | Due on company profit at 19-25 percent | Largely falls away, because the income is already taxed as pay |
| Expenses | Normal business expenses are deductible | Very restricted; most travel and subsistence to the workplace is not |
| Employment rights | None from the client | Still none from the client, despite employee-style tax |
The rate on the contract is only half the story. The same £500 day rate produces noticeably different take-home pay under each outcome, which the worked example below shows line by line. If you are comparing a contract offer against a salary, our guide on converting a day rate to a salary shows the 220-day conversion most UK contractors use.
Who decides if you are inside or outside IR35?
Who decides depends on the client. Public sector clients have decided since April 2017, and medium or large private sector clients since April 2021. The client must take reasonable care and give you a Status Determination Statement (SDS) with its reasons. With a small private client, your own company still decides under the original Chapter 8 rules.
| Client type | Who decides | Who carries the tax risk if it is wrong |
|---|---|---|
| Public sector body | The client | The client or fee-payer |
| Medium or large private company | The client, via an SDS | The client or fee-payer |
| Small private company | Your limited company (Chapter 8) | Your company |
| Wholly overseas client, no UK connection | Your limited company (Chapter 8) | Your company |
A private company counts as small when it meets two of the three Companies Act tests: turnover of not more than £15 million, a balance sheet total of not more than £7.5 million, and no more than 50 employees. You can ask a client to confirm its size, and you should, because the answer decides who holds the risk. If the client fails to take reasonable care, or never issues an SDS, the responsibility for deducting tax can stay with the client rather than moving down the chain.
Tip: Keep the SDS with the signed contract for every engagement. If HMRC ever opens an enquiry, the statement, the contract and your actual working practices are the three pieces of evidence that matter.
How is IR35 status judged?
Status turns on the reality of the working relationship, not the label in the contract. HMRC and the tribunals weigh a set of tests built up through case law, and no single test decides the outcome on its own. A contract that says one thing while the day-to-day work does another will be read on the work, not the words.
| Status test | Points outside | Points inside |
|---|---|---|
| Substitution | You can send a qualified substitute, and the client accepts them | You personally must do the work |
| Control | You decide how, when and where the work is done | The client directs your hours, location and methods |
| Mutuality of obligation | No obligation to offer or accept further work | Work is expected to keep coming, and you must take it |
| Financial risk | You fix mistakes at your own cost and can make a loss | You are paid the same regardless of outcome |
| Part and parcel | You sit outside the client’s structure, with your own kit and other clients | You manage client staff, appear on the org chart, get employee-style perks |
HMRC’s free Check Employment Status for Tax (CEST) tool runs through these areas and gives a determination HMRC says it will stand by, provided the answers are accurate and the arrangement matches what you entered. Treat a CEST result as a starting point rather than a verdict: it does not weigh mutuality of obligation the way the tribunals do, and borderline or high-value contracts are worth an independent contract review.
Watch out: A blanket determination, where a client declares every contractor inside without assessing each engagement individually, is not reasonable care. If your SDS shows no engagement-specific reasoning, that is grounds to challenge it.
Worked example: £500 a day inside vs outside IR35 in 2026/27
Here is the same contract taxed both ways. Assumptions: a day rate of £500 for 220 billable days, so £110,000 of contract income; one director-shareholder; no pension contributions, no claimable expenses and no other income; VAT ignored. The outside route uses a £12,570 salary plus dividends. The inside route assumes the fee-payer treats the £110,000 as the assignment budget, so employer NI at 15 percent above the £5,000 secondary threshold and the 0.5 percent apprenticeship levy come off before a deemed salary is paid (the standard umbrella and agency model). Rates are the 2026/27 figures from HMRC’s published rates and allowances, including the dividend rates that rose on 6 April 2026 to 10.75 percent basic and 35.75 percent higher.
| Outside IR35 (limited company) | Amount |
|---|---|
| Contract income (220 days at £500) | £110,000 |
| Director’s salary | minus £12,570 |
| Employer NI on salary: (£12,570 minus £5,000) at 15 percent | minus £1,136 |
| Profit before corporation tax | £96,295 |
| Corporation tax: 25 percent of profit, minus marginal relief of 3/200 x (£250,000 minus £96,295) | minus £21,768 |
| Available as dividends | £74,526 |
| Dividend tax: first £500 at 0 percent, £37,200 at 10.75 percent, £36,826 at 35.75 percent | minus £17,164 |
| Take-home pay | £69,932 |
| Inside IR35 (deemed employment) | Amount |
|---|---|
| Contract value | £110,000 |
| Employer NI at 15 percent and 0.5 percent apprenticeship levy taken off the rate | minus £14,113 |
| Deemed salary | £95,887 |
| Income tax: £37,700 at 20 percent, £45,617 at 40 percent, after the £12,570 personal allowance | minus £25,787 |
| Employee NI: £37,700 at 8 percent, £45,617 at 2 percent | minus £3,928 |
| Take-home pay | £66,172 |
On identical work, the inside contract pays £66,172 against £69,932 outside: a gap of £3,760 a year, about £313 a month. The total deduction is 39.8 percent of the contract value inside, against 36.4 percent outside. Run your own salary and dividend figures through LancerBill’s UK income tax calculator to see the personal tax side at your income level, and sense-check the monthly view with the monthly rate calculator.
Two practical conclusions. First, an inside contract needs a higher rate to stand still: at these figures, roughly £535 a day inside matches £500 a day outside. Second, the gap widens once you add what the example leaves out, such as pension contributions through the company and deductible expenses, both of which work far better outside. Whatever your status, invoice promptly and in full: the free invoice generator handles VAT and payment terms without an account.
Tip: One Chapter 8 detail rarely mentioned: when your own company decides status (small clients), a 5 percent allowance is deducted before working out the deemed payment. Under Chapter 10, where the client decides, there is no 5 percent allowance at all.
Can you challenge an inside IR35 determination?
Yes. If the client decides your status, it must run a disagreement process and respond within 45 days, either with a new SDS or with its reasons for standing by the original. You challenge in writing, with evidence: contract terms, your right of substitution, other clients, and anything showing your working practices differ from the SDS.
Challenge the facts, not the conclusion. A client that took reasonable care can still have been given the wrong facts by a hiring manager, and correcting the record on control, substitution and financial risk is what changes outcomes. While the disagreement runs, the original determination stays in force, so tax continues to be deducted as inside until the SDS is replaced. If your company is the decision-maker under Chapter 8, there is no SDS to challenge, but document your own reasoning at the start of the engagement in case HMRC asks later.
Construction contractors face an extra layer, because IR35 and the Construction Industry Scheme can touch the same engagement. Our CIS deductions guide explains how the 20 and 30 percent deductions work alongside status decisions.
Key takeaways
- IR35 taxes you as an employee when the real relationship with the client is employment, ignoring the limited company in between.
- Public sector and medium or large private clients decide your status and must issue an SDS; small clients leave the decision, and the risk, with your company.
- Status is judged on substitution, control, mutuality of obligation, financial risk and how embedded you are, based on real working practices.
- At £500 a day for 220 days in 2026/27, inside IR35 pays about £66,172 against £69,932 outside, a gap of £3,760 a year.
- An inside contract needs roughly £535 a day to match £500 outside, so negotiate the rate before you sign, not after.
- You can challenge an SDS; the client must respond within 45 days.
Once you know your IR35 position, the next question is the vehicle: our umbrella company vs limited company comparison works through the take-home maths for UK contractors in 2026/27.
Frequently asked questions
What is IR35 in simple terms?
IR35 is a set of tax rules that stops contractors paying themselves like a business when they really work like an employee. If you work through a limited company but the job looks like employment once the company is ignored, HMRC taxes the contract income as salary, with income tax and National Insurance deducted.
Who decides my IR35 status in 2026/27?
Your client decides if it is a public sector body or a medium or large private company, and it must give you a Status Determination Statement with reasons. If the client is small (two of: turnover up to £15 million, balance sheet up to £7.5 million, no more than 50 staff), your own limited company decides under the original Chapter 8 rules.
How much more tax do you pay inside IR35?
It depends on your rate and costs, but on £110,000 of contract income (£500 a day, 220 days) the 2026/27 example in this guide shows £66,172 of take-home pay inside against £69,932 outside, a difference of £3,760. The gap usually grows once pension contributions and deductible expenses are included, because both work better outside.
Can I still use my limited company for an inside IR35 contract?
Yes. The contract can still run through your company, but the fee-payer deducts income tax and employee National Insurance from the payment before it reaches the company, and employer NI is also accounted for. You cannot simply pay the income out as dividends to avoid the deduction; the tax is taken at source.
Does IR35 apply to sole traders?
No. IR35 applies where services are provided through an intermediary, usually a limited company. If you work as a sole trader directly for a client, the separate employment status rules decide whether you should be taxed as an employee, but that is not an IR35 determination and there is no SDS process.
What happens if my client gets my IR35 status wrong?
Where the client is the decision-maker, the tax liability for a wrong determination generally sits with the client or the fee-payer, provided the client took reasonable care and issued a valid SDS. Where your company decides (small clients), your company carries the liability for unpaid tax, NI, interest and possible penalties, which is why documenting your reasoning matters.
This guide is for general information only and is not financial, tax or legal advice.