What is IR35 and how is a contractor’s status determined?
IR35 is off-payroll working legislation designed to prevent ‘disguised employment’—where a contractor sets up a limited company to offer services but operates in a way that resembles a permanent employee. To determine your status, HMRC applies three core legal tests:
Supervision, Direction, and Control: Does the client dictate your working hours, how you complete the tasks, and where you work? If they control your day-to-day work, you are likely inside IR35.
Right of Substitution: Can you send a qualified colleague or subcontractor to do the work in your place without the client’s veto? A genuine business contract features a right of substitution.
Mutuality of Obligation (MOO): Is the client obliged to offer you ongoing work, and are you obliged to accept it? A lack of mutual obligation indicates an independent contract.
What are the tax differences between Inside and Outside IR35?
If you are classified as ‘Outside IR35’, you are treated as an independent business. You receive gross contract payments to your limited company, deduct business expenses, and extract profits via a tax-efficient mix of salary and dividends, saving thousands in National Insurance. If you are deemed ‘Inside IR35’, you are taxed as an employee. Your client or agency must deduct PAYE Income Tax and National Insurance contributions at source before paying you. If you work through an umbrella company, they will deduct employee tax/NI, the umbrella margin fee, and employer NI (15.0%) and the Apprenticeship Levy (0.5%) directly from your day rate.