IR35 is the informal name for the Intermediaries Legislation, introduced by HMRC in April 2000. It exists to identify contractors who work through their own limited company but whose working arrangement closely resembles permanent employment. If your contract falls inside IR35, you pay roughly the same tax and National Insurance as an employee, even though you run your own business.
Why does IR35 exist?
Before IR35, it was relatively straightforward for a worker to leave employment on a Friday and return the following Monday as a contractor through a limited company, performing the same role but paying significantly less tax. HMRC viewed this as tax avoidance. IR35 was designed to close that gap by ensuring that those who work like employees pay employee-level taxes, regardless of the corporate structure they use.
Who does IR35 affect?
IR35 affects any individual who provides their services to a client through an intermediary, typically a personal service company (PSC). It does not apply to sole traders or to contractors who genuinely operate as independent businesses with multiple clients, their own equipment, and full control over how work is delivered.
Inside vs outside IR35
If HMRC or the end client determines that your engagement falls inside IR35, tax and NICs are deducted at source as though you were employed. Your take-home pay drops considerably. If your engagement is outside IR35, you retain the tax efficiencies of operating through a limited company, taking a combination of salary and dividends.
Who decides your IR35 status?
Since April 2021, the responsibility for determining IR35 status shifted from the contractor to the end client for medium and large businesses in the private sector. The public sector has operated under these rules since April 2017. Small private-sector clients still leave the determination to the contractor.
Key takeaway
Understanding IR35 is essential for every UK contractor. It directly affects how much you earn, how you structure your business, and which contracts you pursue. The difference between inside and outside IR35 can amount to thousands of pounds per year, so getting independent professional advice before accepting a contract is strongly recommended.