IT Contractor IR35 Status: Determination Tests & £500/Day Worked Example 2026/27

Why IT contracting sits at the centre of the IR35 debate

Software developers, sysadmins, DevOps engineers and other IT contractors were the group the original 2000 IR35 legislation was designed around, and they remain the largest population affected by the 2021 off-payroll reforms. That's partly because IT contracting naturally produces mixed signals: a developer might have genuine autonomy over how they write code, yet still be expected to attend daily stand-ups, use the client's Jira board, and work to sprint deadlines set by someone else's product manager — features that can look a lot like employment.

Getting the determination right matters financially. As the worked example below shows, the gap between inside and outside IR35 take-home is real, even if it's often smaller than the eye-catching headline percentages once you factor in Corporation Tax marginal relief correctly.

The three tests, applied to IT contracting specifically

1. Substitution. Could your limited company send another qualified developer to complete the work in your place, with the client having no effective right of veto over a competent substitute? A genuine, unfettered substitution clause is one of the strongest indicators of self-employment. In practice, few solo IT contractors ever exercise it, but the clause needs to be real — not a "sham" clause inserted purely to look good on paper while the actual working arrangement requires you personally, with any named substitute needing sign-off that amounts to a personal-service requirement in disguise.

2. Control. Does the client control how, when and where you do the work, beyond what's reasonably needed to integrate with a team (e.g. attending necessary meetings)? A contractor engaged to deliver a defined piece of infrastructure automation, working their own hours and choosing their own tools and approach, looks outside IR35. A contractor who must work 9-to-5 in the office, follow the client's specific coding standards under direct supervision, and take day-to-day task allocation from a client line manager looks inside.

3. Mutuality of obligation (MOO). Is the client obliged to keep offering you work, and are you obliged to accept it? Classic contracting — engaged for a defined project or fixed period, with no obligation on either side once it ends or between engagements — points outside IR35. Rolling "as required" IT support arrangements, where the client expects you to pick up whatever comes in and you're expected to say yes, blur into an employment-like relationship.

CEST: useful starting point, not the final word

HMRC's Check Employment Status for Tax (CEST) tool is free, produces an instant determination, and HMRC has committed to stand by CEST outcomes provided the answers given were accurate and honest. For many straightforward contracts it's a reasonable first pass. Its well-documented weaknesses are that it doesn't ask about mutuality of obligation directly, and it can produce "unable to determine" outcomes for genuinely borderline cases — at which point an independent IR35 specialist review, typically £150-£500, is worth commissioning, particularly for higher-value or longer-running contracts. CEST is not a legally binding determination in the way a court or tribunal ruling would be; it's evidence of HMRC's own stated position, which carries weight but isn't absolute.

Worked example: £500/day, 230 working days, £115,000 gross

We'll use a full-time IT contractor working 5 days a week across roughly 46 working weeks (accounting for holiday and gaps between contracts) — 230 days at £500/day, giving £115,000 annual contract revenue.

Outside IR35 — limited company route

Step 1 — small salary:

• Salary: £12,570 (at the Personal Allowance — no income tax).
• Employer NI on salary above the £5,000 secondary threshold: (£12,570 − £5,000) × 15% = £1,136.

Step 2 — company profit and Corporation Tax:

• Revenue: £115,000.
• Less salary and employer NI: £13,706.
• Less typical running costs (accountancy, insurance, software, home office): £3,000.
• Profit before CT: £98,294.
• Corporation Tax with marginal relief (profit between £50,000 and £250,000): approximately £22,298 (an effective rate of ~22.7%, well below the headline 25% main rate).
• Available for dividends: £75,996.

Step 3 — dividend tax:

• Dividend allowance: £500.
• Remaining basic-rate band after salary: £37,700, taxed at 8.75%... at the increased 2026/27 dividend ordinary rate: £37,700 taxed accordingly, and the remaining £37,796 falling into higher-rate dividend tax.
• Total dividend tax: approximately £17,565.

Outside IR35 take-home: £12,570 (net salary) + £58,431 (net dividends) = approximately £71,000.

Inside IR35 — deemed employment via the fee-payer

Inside IR35, the fee-payer (agency or client) treats the £115,000 contract value as if it were gross employment income, deducting employer NI before running the remainder through PAYE.

• Contract revenue: £115,000.
• Employer NI: (£115,000 − £5,000) × 15% = £16,500.
• Deemed salary for PAYE: £98,500.
• Income tax: 20% on £37,700 (£7,540) + 40% on £48,230 (£19,292) = £26,832.
• Employee NI: 8% on £37,700 (£3,016) + 2% on £48,230 (£965) = £3,981.
• Inside IR35 take-home: £98,500 − £26,832 − £3,981 = approximately £67,687.

Side-by-side comparison

The main driver of the gap isn't income tax at all — it's employer NI, which is roughly 14.5x higher inside IR35 (£16,500 vs £1,136) because inside IR35 the whole contract value is treated as employment cost, whereas outside IR35 only the modest £12,570 salary attracts it.

Practical steps for an IT contractor assessing status

• Review your actual contract and the real working practices — HMRC and tribunals look at what genuinely happens, not just the wording. A contract with a strong substitution clause is worthless if daily reality shows the client would reject any substitute.
• Run CEST yourself even if the end client also runs it, so you understand which factors are borderline.
• Keep a written record of how you actually work: your own equipment, your own hours where possible, deliverable-based invoicing rather than timesheet-based hourly billing, and evidence of working for multiple clients if applicable.
• If the determination is inside IR35 and you disagree, use the end client's mandatory status disagreement process before escalating — since April 2021 clients must have one.

Filing and paying either way

Whether inside or outside IR35, your limited company still files a Confirmation Statement and annual accounts with Companies House, and a Corporation Tax return with HMRC. Inside IR35, expect the fee-payer's deductions to appear on your payslips from that engagement, and factor any dividend income from other outside-IR35 work into your Self Assessment return by 31 January following the tax year end.