Answers · UK 2025/26

What is off-payroll working (IR35) for contractors in 2026/27?

Off-payroll working rules (commonly called IR35) determine whether a contractor working through their own limited company should be taxed like an employee for that engagement. Since April 2021, medium and large private-sector clients (not the contractor) are responsible for assessing status and, if "inside IR35" applies, the fee-payer must deduct Income Tax and employee NI as if the contractor were on payroll.

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IR35, formally the "off-payroll working rules," is anti-avoidance legislation designed to ensure that people who work like employees but are engaged through an intermediary (typically their own personal service company, or PSC) pay broadly the same tax and NI as an equivalent employee, rather than benefiting from more favourable limited-company tax treatment. **Inside vs outside IR35** - **Inside IR35**: HMRC considers the engagement to be one of "disguised employment" -- the contractor is, in substance, working like an employee of the client. Tax and employee NI must be deducted at source as if the contractor were an employee, significantly reducing take-home pay compared to normal limited company dividend/salary extraction. - **Outside IR35**: the engagement is genuinely a business-to-business relationship. The contractor's limited company can pay itself via a mix of salary and dividends in the normal tax-efficient way, without PAYE deduction at the point of payment from the client. **Who decides status, and who is liable** Since 6 April 2021, for medium and large private-sector clients (broadly, companies exceeding two of: £15 million turnover, £7.5 million balance sheet, 50 employees -- Companies Act small company thresholds), the CLIENT is legally responsible for determining IR35 status, not the contractor. If deemed inside IR35, the "fee-payer" (usually the recruitment agency or client paying the PSC) must deduct Income Tax and employee NI before paying the contractor's company, and also pay employer NI and the Apprenticeship Levy on top. **Small companies exempt from the shift** If the end client is a genuinely small company (below the thresholds above), the OLD rules still apply -- the contractor's own limited company remains responsible for self-assessing IR35 status, as was the case before April 2021. **Key status factors HMRC considers** - **Control**: does the client control how, when, and where the work is done, similar to an employer? - **Substitution**: could the contractor genuinely send a substitute to do the work instead of them personally? A real, unfettered right of substitution is one of the strongest indicators of being outside IR35. - **Mutuality of obligation**: is the client obliged to offer work and the contractor obliged to accept it, similar to an ongoing employment relationship? **Status Determination Statement (SDS)** Clients must provide a Status Determination Statement setting out their IR35 decision and reasoning to both the contractor and the fee-payer, and must have a process for contractors to formally dispute the determination (Client-Led Status Disagreement Process). **Worked example** Sarah runs a PSC and is engaged by a large bank for a 12-month IT project, working set hours on-site under close direction, with no right to send a substitute. The bank's HR assesses this as inside IR35. The recruitment agency, as fee-payer, deducts Income Tax and employee NI from each invoice before paying Sarah's company, and separately pays employer NI to HMRC -- Sarah's take-home from the engagement is much closer to that of an equivalent employee than a typical outside-IR35 contractor. **HMRC's Check Employment Status for Tax (CEST) tool** HMRC provides a free online tool (CEST) to help assess status, and HMRC has committed to standing by the result if the tool is used accurately and the answers reflect the genuine working arrangement -- though many advisers view CEST as imperfect and recommend independent contract review for higher-value or complex engagements.