What is IR35 (off-payroll working rules)?
IR35 is the tax rule that decides whether a contractor working through their own limited company is really a 'disguised employee' — and should therefore pay employment taxes rather than lower company taxes.
How IR35 works
A contractor operating through a personal service company can take income as dividends and expenses, paying materially less tax than an employee on the same money — and their client escapes employer National Insurance too. IR35 (introduced 2000, tightened in 2017 for the public sector and 2021 for medium and large private firms) asks: if the company didn't exist, would this person be an employee? If "inside IR35", tax and NI are deducted like a salary. Since 2021 the client, not the contractor, decides status for most engagements — using tests like control, substitution and mutuality of obligation.
Why everyone hates it (for different reasons)
Contractors say the rules are vague, the status tests unpredictable, and that risk-averse clients now blanket-ban limited-company contractors — pushing genuine freelancers into umbrella companies with employee-level tax but no employee rights. HMRC counters that disguised employment costs the Exchequer billions and undercuts employees doing identical work. Tribunals over broadcasters and IT contractors have run for years with contradictory outcomes, which rather proves both points.
Why it matters now
Reform UK pledges to abolish IR35 outright as part of its corporation-tax package — the only party promising that. Any abolition would revive the original question IR35 was invented to answer: how to stop employment being repackaged as contracting purely to cut tax.
Plain-English guide for general information only — not financial, legal or tax advice. Rates are 2026/27 unless stated. Last reviewed 5 July 2026.
Frequently asked questions
What does 'inside IR35' mean?
It means HMRC (or your client) considers your contract effectively employment — so income tax and National Insurance are deducted from your fees like a salary, usually leaving you 20–25% worse off than working 'outside IR35' through your company.
Who decides my IR35 status?
Since April 2021, the end client decides for medium and large businesses (and all public bodies), using tests like control over your work, whether you could send a substitute, and mutuality of obligation. Only small-company clients leave the decision with the contractor.
Which party would abolish IR35?
Reform UK pledges to abolish the off-payroll rules as part of its corporation tax package (cutting the rate to 20% then 15%). No other major party proposes abolition.