IR35 is the legislation that decides whether HMRC sees you as a genuine freelancer or a disguised employee. The difference is not academic. Inside IR35 you pay tax like a permanent employee. Outside IR35 you keep the tax efficiency of running through a limited company. The gap is several thousand pounds a year for most contractors, every year you stay inside. Getting this wrong is one of the most expensive mistakes in UK contracting.
What IR35 Is Actually Testing
IR35 is not a single rule. It is three tests of the reality of your working relationship with each client. Control: how much does the client direct what, when and how you do the work? Substitution: can you send someone else in your place to do the work? Mutuality of obligation: is the client obliged to give you work, and are you obliged to accept it? The more your relationship looks like employment, the more likely you are inside IR35. A contract that says one thing on paper does not save you if your day-to-day reality says another.
Inside IR35: The Real Take-Home Hit
Being inside IR35 means the income from that contract is treated as employment income. Your limited company has to deduct PAYE and NI before paying it to you. No dividends. No splitting income with a spouse. The effective tax rate ends up materially higher than the same revenue managed outside IR35 through a salary-and-dividend structure. The size of the gap depends on your earnings level, pension contributions, and how employer NI is handled in your contract, and it narrowed slightly when dividend tax rates rose in April 2026, but it remains worth thousands of pounds a year for most contractors.
Outside IR35: What You Need to Prove
Being outside is about evidence, not contracts. The written contract needs to reflect the three tests above. The reality of how you work needs to match. We tell clients: keep records of multiple concurrent clients, document any substitution rights actually exercised, do not accept employee perks like sick pay or training. None of this matters individually. All of it matters together if HMRC ever opens an enquiry.
The Public Sector and Private Sector Rules
Since 2017 in the public sector and 2021 in the private sector for medium and large clients, the responsibility for determining IR35 status sits with the end client, not the freelancer. Small clients still rely on the freelancer’s own determination. The 2021 change pushed plenty of genuinely outside-IR35 contractors inside, because end clients took the cautious view to protect themselves from liability. If you are working for a large private-sector client and they have put you inside, that is their call to make, not yours.
What to Do If a Client Moves You Inside
If a client switches you from outside to inside mid-engagement, your tax position changes the same day. You can carry on through an umbrella company, accept the PAYE treatment through your limited company, or walk away. Each has implications for existing dividends, pension contributions, and your future tax position. None of them are good options. All of them are better than ignoring the issue and ending up with a backdated HMRC bill.
Speak to a Business Strategy Accountant Today
The cost of getting IR35 wrong is several thousand pounds a year in extra tax, plus potential backdated liabilities and penalties if HMRC challenges you. A specialist freelancer accountant reviews your contracts and working practices, gives you a defensible position, and tells you straight when you need to change something.
