IR35 and Off-Payroll Working: What UK Contractors and Directors Need to Know
Reviewed by Usman, Senior Accountant · Route Business Hub · Last reviewed 15 July 2026
IR35 — the off-payroll working rules — decide whether someone operating through their own limited company is taxed broadly as an employee of their client for a given engagement, or as a genuine independent business. The rules themselves haven't changed much in years; what changed in 2021 is who's responsible for deciding your status, and that shift is what catches most contractors and directors out.
What IR35 actually tests — and who decides your status
The off-payroll working rules (see GOV.UK's guidance on off-payroll working) test whether, if your limited company were removed from the arrangement, you'd look like an employee of the end client. The main factors are control (does the client direct how, when, and where you work, or do you decide that yourself), substitution (could you genuinely send someone else to do the work in your place), and mutuality of obligation (is the client obliged to keep offering you work, and you obliged to accept it).
Since April 2021, medium and large private-sector clients — and all public-sector clients since 2017 — are responsible for assessing your status and issuing a Status Determination Statement. Small private-sector clients are exempt from this, in which case your own company remains responsible for self-assessing status, the same as before 2021.
The "small company exemption" is based on the client's size, not yours, judged against Companies Act thresholds for turnover, balance sheet total, and employee numbers. Assuming a client is small without actually checking against those figures is a common and avoidable mistake.
Inside IR35 vs. outside IR35 — what actually changes
If an engagement is inside IR35, the fee-payer (usually the agency or client) deducts income tax and National Insurance at source before paying your company, broadly as if you were their employee for that engagement — most of the tax efficiency of working through a limited company disappears for that specific contract.
If an engagement is outside IR35, your company is taxed as a genuine business as normal — it pays corporation tax on profit, and you extract that profit through salary and dividends in the usual way.
Status is assessed per engagement, not as a single label for your company — it's entirely possible to be inside IR35 on one contract and outside on another at the same time, which means your company's finances often need managing differently depending on the mix of work you have running.
A worked example: £80,000 of contract income across the year
Outside IR35: your company pays corporation tax on the £80,000 profit (after allowable expenses) — approximately £17,450 at current marginal-relief rates — leaving £62,550 to extract via salary and dividends in the usual way.
Inside IR35: the fee-payer deducts income tax and employee National Insurance before paying your company, broadly as if the whole £80,000 were direct employment income for that engagement — most of the extraction flexibility above disappears specifically for that contract's income.
Where the biggest risk actually sits: the determination, not just the contract
HMRC's Check Employment Status for Tax (CEST) tool is what most clients use to assess status, and it has well-documented limitations, particularly on genuinely borderline cases — an "unable to determine" result still requires a documented rationale from the client, not just a shrug.
A written contract that says "outside IR35" doesn't protect you if the actual working practices — fixed hours, direct day-to-day supervision, no genuine right of substitution in practice — look like employment. HMRC and tribunals look at how the engagement actually operates, not just what the paperwork claims.
Since April 2024, HMRC will offset tax your company has already paid against any liability found on investigation, which reduces the previous risk of the same income effectively being taxed twice — but it doesn't eliminate the financial and administrative cost of an incorrect determination being challenged.
What to actually do about it as a director
Keep evidence of genuine business-to-business working practices as they happen — instances where substitution was used or at least genuinely available, evidence of financial risk you carry that an employee wouldn't, work for multiple clients — rather than trying to reconstruct this after an enquiry has already started.
Review status determinations you're given rather than accepting them passively. Clients can get this wrong, and there's a mandatory client-led status disagreement process you're entitled to use if you disagree with a determination.
Plan your company's salary and dividend position around your actual mix of inside/outside engagements for the year, since an inside-IR35 engagement changes how much genuinely tax-efficient extraction is even available from that income.
This is general information, not personalised advice — tax treatment depends on your specific circumstances, and rates and thresholds shown here can change. Talk to us before acting on your own position.
Want the short version now? Our UK Corporation Tax During Your Dubai Transition page covers the core of this today.
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