What's IR35 and does it affect you?

IR35 decides whether you pay tax as an employee or as a genuine contractor when you provide your services through your own limited company. It affects you directly if you work as a contractor. And it affects your business if you take on contractors who work through their own companies too.

The rules exist to make sure that people working like employees pay tax like employees, even when a limited company sits between them and the business they work for.

Who does IR35 apply to?

IR35 applies to you if you supply your services through an intermediary, usually your own limited company, sometimes called a personal service company, rather than working as a direct employee.

It covers three parties:

1.     You, the worker, providing services through your company

2.     The client receiving those services

3.     Any agency that sits between you and the client

If you invoice a client directly through your limited company for work you do personally, IR35 is something you need to think about.

What's the difference between inside and outside IR35?

Your status depends on how the working relationship operates in practice, from who controls your day-to-day work to whether you carry any financial risk on the job.

You're likely outside IR35 if:

•     you control how, when and where you do the work;

•     you can send someone else to do it in your place;

•     you carry some financial risk, such as fixing errors in your own time.

You're likely inside IR35 if:

•     the client directs your day-to-day work;

•     you're expected to do the work personally;

•     you're treated much like one of their employees, just paid through a company instead of payroll.

Who decides your status?

Since April 2021, medium and large private sector clients have been responsible for deciding your IR35 status and issuing a status determination statement to explain their decision.

Small clients are the exception. If your client qualifies as small, the decision sits with you. This means you need to assess your own status.

A client counts as small if it meets two of these three criteria:

1.     Annual turnover of £15 million or less

2.     A balance sheet total of £7.5 million or less

3.     50 employees or fewer

The higher thresholds (£15 million turnover and £7.5 million balance sheet) formally apply to the off-payroll rules from 6 April 2026.

But most existing medium-sized companies won't see the practical reclassification to small, and the resulting shift in IR35 responsibility, until the 2027/28 tax year.

That's because company size for IR35 purposes is judged on the prior financial year's accounts, and under the Companies Act rules, a company generally needs to meet the new thresholds for two consecutive years before its classification changes.

HMRC's Check Employment Status for Tax tool is the easiest way to determine your IR35 status.

What happens if your status is wrong?

If you're inside IR35, tax and National Insurance are deducted from your fee before it reaches your company, in the same way they'd be deducted from a salary. The fee payer, the party paying your company, handles these deductions and pays employer National Insurance on top.

If a status decision turns out to be wrong, HMRC can pursue the party responsible for the decision, to claim the tax that should have been paid. For contracts with medium or large clients, that's the client. For contracts with small clients, that's you.

What if you take on contractors?

If your business brings in contractors who work through their own limited companies, IR35 is your responsibility too.

First, work out whether the small company exemption applies to you. You'll know straight away whether it's on you to assess each contractor's status and issue a statement, or whether that job sits with them.

Getting this right protects your business as much as it protects the contractor. A wrong call under the rules can leave you covering tax that should have come from the contractor's company, plus interest on top.

If you provide services through your own limited company, or you're taking on contractors in your business, we can help you work through where you stand and what it means for how you're paid.

Get in touch and we can talk it through.