How do I actually know if I'm inside or outside IR35?

Start with who is responsible. If your client is medium or large, or public sector, they must give you a status determination statement and you should hold a copy. If the client is small, the assessment is your company's to make. Either way the answer comes from control, personal service and mutuality of obligation, tested against how the engagement really runs rather than what the contract says. Run HMRC's CEST tool yourself and keep the output, then look for the gaps between the contract wording and your working week. Where a contract is finely balanced or high value, get it reviewed before you sign rather than after HMRC asks.

My client says everyone here is inside IR35. Can they do that?

A blanket policy is not a status determination. Where the client is responsible, the rules require them to take reasonable care and assess each engagement individually, giving reasons. A determination issued without genuine consideration of your specific arrangement can be challenged through the client-led disagreement process, and they must respond with a revised determination or their reasons within 45 days. If they miss that deadline, the tax liability passes to them. In practice many clients adopted cautious policies because the risk of getting a determination wrong now sits with them. That is understandable, but it is not the same as the rules requiring it.

Is it still worth having a limited company if most of my work is inside IR35?

Often yes, though for reasons beyond tax on that engagement. On 2026/27 rates the take-home difference on a £100,000 contract in the worked example above was about £2,895, so the company is no longer the dramatic saving it once was. But a company still gives you a vehicle for outside-IR35 work alongside it, deductions for genuine business costs on that work, employer pension contributions, limited liability, and a structure clients and agencies expect. If literally all your work is inside IR35 and looks set to stay that way, the running costs and admin deserve an honest review.

Does being inside IR35 make me an employee with employment rights?

No, and this is one of the genuine unfairnesses of the regime. IR35 determines employment status for tax purposes only. It does not give you holiday pay, sick pay, redundancy rights, notice or protection from unfair dismissal, and it does not make the client your employer in employment law. Employment rights are decided separately, under different tests, by employment tribunals rather than HMRC. It is entirely possible to be taxed like an employee on an engagement while holding none of the rights of one, which is worth factoring into the rate you accept for inside-IR35 work.

IR35: inside or outside — what it means

Q: What happens if HMRC decides I got my status wrong?

Where your own company was responsible for the assessment, HMRC can assess the Income Tax and National Insurance that should have been paid, plus interest, and penalties where they consider the error careless or deliberate. Since 6 April 2024 HMRC can set off tax already paid by you and your company against a deemed employer's PAYE liability, which removes a large part of the double-counting that made earlier assessments so punishing. The practical problem remains timing: an assessment usually lands years after the work was done and the money spent. That is precisely why contemporaneous records of your working practices matter.

If you contract through your own limited company — a personal service company, or PSC — IR35 is probably the single most confusing part of how you're taxed. The terminology doesn't help: “inside,” “outside,” “deemed employment,” “status determination statement.” None of it explains itself. So here is the plain-English version: what the rules are actually testing, who decides, what the difference is genuinely worth in pounds on a real contract in the 2026/27 tax year, and what to do about it this week.

What IR35 is trying to work out

IR35 exists to answer one underlying question: if you weren't working through a limited company, would this arrangement actually look like employment? HMRC's concern is contractors who, in practice, work like an employee of the client — same hours, same supervision, same integration into the team, no real ability to send someone else — but who take income as dividends through a company instead of as salary, which historically meant paying less tax and National Insurance than an equivalent employee.

IR35 is the rule that tries to close that gap and tax the engagement more like employment where it genuinely resembles one. It applies engagement by engagement, not to you as a person. You can hold three contracts at once and have all three land differently.

Inside and outside, in plain terms

“Outside IR35” means the engagement looks like a genuine business-to-business relationship. You control how the work gets done, you carry real commercial risk, and in principle you could send a substitute. Your company invoices, pays Corporation Tax on its profits, and you extract income as salary and dividends in the normal way.

“Inside IR35” means the engagement looks like disguised employment, whatever the contract calls it. Income Tax and employee National Insurance are deducted at source from the fee, broadly as if you were an employee of the client, even though your company still exists for everything else.

The tests that actually decide it

There is no statutory checklist. Status comes from decades of employment case law, and three factors carry most of the weight:

Control. Does the client direct what you do, how you do it, when and where? A client saying “we need this API delivered by March” is buying a result. A client putting you on a rota and telling you which ticket to pick up next is directing an employee.
Personal service and substitution. Must you personally do the work, or could you send a suitably qualified replacement at your own cost? A substitution clause that has never been usable in practice — because the client insists on their own security vetting and approval — carries very little weight.
Mutuality of obligation. Is the client obliged to keep offering you work, and are you obliged to accept it? A contract for a defined piece of work that simply ends points outside; rolling extensions where you are expected to stay busy point inside.

Secondary factors then tip finely balanced cases: whether you use your own equipment, carry your own insurance, correct defects at your own expense, work for other clients, and are visibly not part of the client's organisation — no line-management, no appraisal, no staff benefits, no company laptop and lanyard.

The single most important principle is that the working reality beats the paperwork. A contract that says you are outside IR35 is worth nothing if the day-to-day arrangement looks like employment.

Who decides — and the small company exemption

For public sector clients, and for medium and large private sector clients, the client assesses your status and must give you a status determination statement (SDS) setting out the conclusion and the reasons for it. Where the client is small, responsibility stays with your own company under the older rules.

HMRC's published test for a small private sector client is the Companies Act small-company definition: a corporate client is not small if it meets at least two of three conditions — turnover of more than £10.2 million, a balance sheet total of more than £5.1 million, or more than 50 employees — for two consecutive financial years. Size is fixed for a whole tax year by reference to the last financial year whose accounts filing period ended before that tax year began. Unincorporated clients such as partnerships are tested on turnover over £10.2 million alone, year by year.

One live complication worth knowing: the Companies Act small-company thresholds themselves were raised to £15 million turnover and a £7.5 million balance sheet total for financial years beginning on or after 6 April 2025. Because of the two-year and filing-date lag built into the size test, that uplift only starts to feed through to off-payroll determinations as those accounting periods work their way through. If your client sits anywhere near the line, do not guess. A client is obliged to confirm its size in writing if you or the agency ask, so ask, and keep the reply.

What the difference is actually worth

Status is not a technicality — it changes what reaches your bank account. Here is an illustrative comparison using 2026/27 rates for England, Northern Ireland and Wales. Take a contract of 200 days at £500 a day: £100,000 of fees.

Outside IR35. Your company bills £100,000. You pay yourself a £12,570 salary, which triggers employer's National Insurance at 15% on the excess over the £5,000 secondary threshold — £1,136. Say £2,000 of genuine running costs: accountancy, professional indemnity and business insurance, software. That leaves £84,295 of taxable profit. Corporation Tax at the main 25% rate with marginal relief comes to £18,588, leaving £65,706 to distribute. On 2026/27 dividend rates — £500 allowance, then 10.75% within the basic rate band and 35.75% above it — the dividend tax is £14,011. You keep roughly £64,265.

Inside IR35. The same £100,000 has to carry the employer's National Insurance before anything is paid to you, so the deemed gross pay is about £87,609 with £12,391 of employer's NI on top of it. Income Tax on that gross pay is £22,475 and employee's National Insurance is £3,763. You keep roughly £61,370.

The gap on a £100,000 contract is about £2,895 — under 3% of the fee. That figure surprises a lot of contractors, and it is the most useful thing in this article. The old rule of thumb that outside IR35 is worth 20-25% more has not survived the last few years: employer's National Insurance rose to 15% on a £5,000 threshold from April 2025, and dividend rates rose again from 6 April 2026. The company route still wins, but by a margin that is now comfortably smaller than most contractors assume, and smaller than the day-rate uplift many people hold out for.

Two caveats on those numbers. They assume no other income, no pension contributions and a sole director with no Employment Allowance. And employer pension contributions — which are efficient on both sides of the line, via salary sacrifice inside IR35 or a direct company contribution outside — are now a bigger lever than the status itself for a lot of people. Your own position will differ; the arithmetic is worth doing on your actual contracts rather than on a rule of thumb.

If you disagree with a determination

An SDS is not the last word. Where the client is responsible for status, they must operate a disagreement process: you put your objection to them, and they must respond with either a revised determination or their reasons for keeping the original within 45 days of receiving your challenge. If they miss that deadline, the tax liability transfers to them, which is a genuine incentive for them to engage.

Make the challenge about working practices, not about what you'd prefer. Point to the specific facts — you set your own hours, you fixed a defect at your own cost, you turned down additional work, you invoice two other clients. A determination produced by running the engagement through HMRC's Check Employment Status for Tax (CEST) tool is only as good as the answers fed into it, and those answers are often supplied by a procurement team who have never seen how you actually work.

What compliant looks like day to day

Compliance is not a one-off tick-box exercise. It means the working practices genuinely match the status claimed, and that you can show it. Keep the signed contract and any upper-level agreement between the agency and the end client, the SDS and any correspondence about it, your CEST output and the answers behind it, evidence of other clients, your insurance schedules, and a note of anything that demonstrates independence — a substitution actually offered, a defect rectified at your cost, a scope change you priced separately.

Get this wrong and the bill does not arrive politely. It arrives well after the work is done and the money is spent, with interest and potentially penalties attached. Since 6 April 2024 HMRC can at least offset tax already paid by you and your company against a deemed employer's PAYE liability, which removes some of the double-counting that made earlier assessments so brutal — but it does not make an incorrect determination cheap.

Five things to do this week

List your live engagements and write the status of each next to it. If you cannot say which rules apply, that is the first gap to close.
Ask each medium or large client for the SDS in writing if you do not already hold one, and ask smaller clients to confirm their size.
Read one live contract against how the work actually runs, and mark every clause the reality does not match.
Run your own CEST assessment on each engagement, save the PDF output, and compare it with the client's conclusion.
Do the arithmetic on your real numbers before you turn down an inside-IR35 contract over status alone — on a £100,000 contract the difference above was under 3%.

This is the sort of thing we handle for contractor clients day to day: reviewing engagements before you sign, challenging determinations that do not reflect the working reality, and extracting income efficiently whichever side of the line a contract falls. Our limited company accounting page sets out how we work, and if the extraction question is the one on your mind, our post on salary versus dividends goes through the arithmetic in detail. If you'd rather just talk it through, get in touch.

IR35: inside or outside — what it actually means