UK IR35 / Off-Payroll Working Rules 2025/26 — Contractor Guide

Reform timeline: 2000 → 2017 → 2021 → 2024

The original IR35 was introduced by the Finance Act 2000 and codified into Chapter 8 of ITEPA 2003. It asked the contractor's PSC to assess whether, but for the intermediary, the worker would have been an employee — and if so, to pay PAYE and NI on the deemed employment income. Because the PSC made the determination and bore the risk, the rules were widely ignored, weakly enforced, and the Treasury never got the receipts it expected.

Three reforms followed:

• April 2017 (public sector): Chapter 10 of ITEPA 2003 — public-sector end-clients (NHS, central government, local authorities, BBC) became responsible for determining status and the fee-payer became responsible for PAYE/NI. The PSC's Chapter 8 obligation falls away inside Chapter 10.
• April 2021 (private sector): the same Chapter 10 framework extended to medium and large private-sector clients. Small clients (Companies Act definition) remain outside Chapter 10 and the contractor's PSC retains the Chapter 8 determination.
• April 2024 (offset): where HMRC successfully challenges an outside determination, the tax already paid by the PSC and worker can now be offset against the deemed PAYE liability of the fee-payer. The previous double-tax outcome was a major reason for blanket inside-IR35 policies; the offset rules have softened that.

Public vs private sector — who is the client?

Under Chapter 10 the "client" is the end-user of the worker's services — the body whose business benefits from the contracted output, regardless of how many agencies sit between them and the PSC. Identifying the client matters because that is the entity which must:

• Make a status determination using reasonable care.
• Issue an SDS to the contractor and to the next party down the chain.
• Operate a disagreement process and respond to challenges within 45 days.

Public-sector clients have been in this regime since April 2017. Medium and large private-sector clients joined them in April 2021 (delayed by 12 months from the originally legislated April 2020 date due to the pandemic). Some sectors — notably oil & gas, broadcasting and IT consultancy — saw substantial market disruption around each reform date, with end-clients issuing blanket "inside IR35" determinations to eliminate risk.

Small client exemption

Chapter 10 does notapply where the end-client is "small" using the Companies Act 2006 definition. A company is small if it meets at least two of:

• Turnover ≤ £10.2 million
• Balance sheet total ≤ £5.1 million
• Employees ≤ 50

Unincorporated end-clients (sole traders, ordinary partnerships) are outside Chapter 10 regardless of size, although LLPs and overseas entities are caught if they are not small. Where the small client exemption applies, the contractor's PSC stays in the Chapter 8 (original IR35) world: the PSC assesses, the PSC pays the deemed PAYE/NI if inside, and the PSC bears the risk if HMRC successfully challenges. The client and any agencies in between have no IR35 obligations at all.

Two practical traps with the small client exemption. First, the exemption is tested at the client's financial year-end and applies from the start of the next tax year — so a fast-growing client may move in and out of Chapter 10 between contracts. Second, "group" thresholds aggregate across connected entities, so a small standalone trading subsidiary of a large group is normally not eligible for the exemption.

The Status Determination Statement (SDS)

The SDS is the document at the heart of Chapter 10. It must:

• State the conclusion — inside or outside IR35.
• Set out the reasoning used to reach that conclusion (not just a CEST printout — the reasoning).
• Be issued to the contractor and to the immediately downstream party in the chain (usually the agency).
• Be reached with "reasonable care" — case-by-case review, not blanket determinations.

Until a valid SDS has been issued and received, the end-client itself remains the deemed fee-payer and keeps the PAYE/NI liability. Many large clients in 2021 issued role-based blanket SDS statements which HMRC subsequently scrutinised for "reasonable care" failings. A defensible SDS now usually includes a contractor questionnaire, a hiring-manager declaration, a contemporaneous CEST output and a named reviewer.

CEST — the HMRC online tool

Check Employment Status for Tax (CEST), at gov.uk/guidance/check-employment-status-for-tax, is HMRC's free online questionnaire. HMRC has committed to stand by a CEST result provided the answers reflect the actual working arrangement and reasonable care was taken.

Pros: free, fast, produces a printable record, gives HMRC's own answer.

Cons:

• Roughly 20% of CEST runs return "unable to determine".
• CEST does not directly weight Mutuality of Obligation, which case law (most clearly PGMOL at Supreme Court level) treats as a core test.
• Tribunal decisions in Atholl House and Kickabout have shown CEST outputs are not conclusive.
• Answers framed too narrowly can flip a result — the same role assessed by two reviewers regularly gets different CEST outcomes.

Best practice for clients: run CEST, keep the printout with the answer trail, and corroborate with a written status review from an IR35 specialist on any borderline role.

Inside IR35 — mechanics

If a contractor is inside IR35 under Chapter 10:

• The fee-payer (usually the agency directly above the PSC; the end-client if no agency) deducts PAYE income tax, employee NI and the apprenticeship levy from the gross fee.
• Employer NI (15% above the secondary threshold, 2025/26) is paid by the fee-payer on top — often passed back to the contractor by way of a reduced day rate.
• The net amount is paid to the PSC as a "deemed direct payment".
• Inside the PSC, that deemed payment is treated as already-taxed — it can flow to the contractor as a salary or dividend without further IR35 tax, although the company still records it.
• The PSC cannot deduct expenses against deemed-payment income (the historic 5% expenses allowance for inside-IR35 engagements was withdrawn for Chapter 10 engagements at the 2017/2021 reforms).
• Fees within Chapter 10 do not qualify for the same Corporation Tax deductibility treatment as ordinary trading turnover — they are taxed at source as employment income.

The result: a contractor inside IR35 ends up with roughly the same net take-home as a directly employed equivalent on the same gross rate — which is, by design, the policy aim of the legislation.

Outside IR35 — mechanics

If a contractor is outside IR35:

• Fees are received by the PSC as ordinary trading turnover.
• The PSC pays Corporation Tax on profit after deducting genuine business expenses (accountancy, software, travel within HMRC rules, business insurance).
• The contractor takes a small "tax-efficient" salary up to the NI secondary threshold and then dividends from post-CT profit.
• Dividends are taxed personally at 8.75% (basic), 33.75% (higher) or 39.35% (additional) on the contractor's self-assessment after the £500 dividend allowance.
• National Insurance — both employer and employee — is largely avoided on the dividend portion.

HMRC scrutiny of outside-IR35 PSCs has stepped up since 2017. Documentation expected to support an outside conclusion typically includes: a defensible contract (substitution clause, no MOO, control language), a confirmation-of-arrangements signed by the engaging manager, and evidence of genuine business behaviours — own equipment, professional indemnity insurance, multiple concurrent clients where realistic, and a registered office independent of the client.

The status tests — what actually decides it

Three primary tests (Ready Mixed Concrete, 1968)

• Personal Service / Substitution: can the worker send a substitute? A genuine, unfettered right of substitution (the client cannot veto a competent replacement, the PSC pays the substitute) points strongly outside. A "fettered" right — client must approve, only used in emergencies — is given little weight.
• Control: does the client direct the what, how, when and where of the work? Detailed instruction, fixed hours and supervision point inside; output-focused, autonomous delivery points outside.
• Mutuality of Obligation (MOO): obligation on client to offer further work and on worker to accept? Ongoing MOO points inside; project-bounded, no follow-on expectation points outside. PGMOL (Supreme Court, 2024) re-anchored MOO as a foundational test.

Secondary factors

• Part-and-Parcel: integrated into the client's organisation? Internal email address, line-manager relationship, attendance at staff events — all point inside.
• Financial Risk: does the contractor stand to lose money if the work goes wrong (own indemnity, rework at own cost, fixed-price overrun)? Real financial risk points outside.
• Equipment: who supplies tools and IT? Contractor-supplied points outside; client-issued laptop and access points inside (though regulatory and security constraints are given some weight).
• Multiple Clients: contemporaneous engagements with several end-clients point outside — a single long-running engagement that displaces all others points inside.
• Intention: what did both parties intend? Less weighty than the objective facts but considered as a tie-breaker.

No single test is conclusive — the tribunal looks at the whole picture, the actual working arrangements (not just the contractual paperwork), and applies a multi-factorial test in the round.

Disguised remuneration — avoid at all costs

Some contractors faced with an inside-IR35 determination are approached by promoters offering "85% take-home" or "umbrella loan" schemes. These are disguised remuneration arrangements — value is extracted as a notional loan that is never repaid, with the intention of avoiding PAYE/NI.

HMRC has pursued these arrangements aggressively since the 2019 Loan Charge, which swept loan-scheme balances outstanding at 5 April 2019 into a single tax bill. Contractors who used these schemes have faced settlements running to six figures, plus penalties and interest, and many promoters have since been disqualified or imprisoned. If a take-home rate looks too good to be true after a fair PAYE/NI calculation, it is — walk away.

The disputes process

Where a contractor disagrees with the client's SDS, Chapter 10 provides a statutory disagreement process:

1. Contractor (or fee-payer) submits a written challenge to the client setting out reasons for disagreement.
2. The client must respond within 45 days — either confirming the original SDS with stated reasons, or issuing a revised SDS.
3. Until the client has responded, the original SDS continues to apply.
4. If still disputed, the only further route is an HMRC enquiry, ultimately appealable to the First-tier Tribunal (Tax).

Tribunal challenges are slow (often 2-3 years to a hearing), expensive (legal fees in the tens of thousands) and binary. Most live disputes are resolved commercially — contract redrafting, role redesign, role termination, or the contractor moving to an umbrella while staying with the same client.

April 2024 — the offset rules

Before 6 April 2024, the practical effect of a successful HMRC challenge was brutal: the fee-payer was charged the full PAYE/NI on the gross fees, even though the PSC and contractor had already paid Corporation Tax, dividend tax and personal income tax on the same money. The same income was taxed twice, with no statutory mechanism to recover the over-paid PSC-level tax.

The Finance (No. 2) Act 2024 introduced an offset: HMRC will now offset Corporation Tax, dividend tax, and income tax already paid by the PSC and the worker against the deemed PAYE liability assessed on the client/fee-payer. The offset is operational rather than retrospective — clients receive a reduced assessment, not a refund — but it materially reduces the cliff-edge risk of an outside determination being overturned.

The market effect has been visible: several large private-sector clients that imposed blanket inside-IR35 policies in 2021 quietly re-introduced outside-IR35 PSC engagements during 2024-2025.

Worked comparison: £500/day, 220 days

A typical UK contractor on £500/day across 220 chargeable days a year invoices £110,000 gross. Below is an illustrative comparison of outside-IR35 (PSC route) vs inside-IR35 (deemed direct payment) net cash in hand, 2025/26 rates, ignoring pension contributions and the £500 dividend allowance.

On these illustrative numbers the difference at £110,000 turnover is surprisingly tight — perhaps £8,000-£12,000 a year in favour of outside-IR35 once realistic expenses, accountancy fees and the employer-NI offset to day-rate (typically -10% to -13% on inside-IR35 rates) are factored in. The common belief that "outside saves 30%" is largely a pre-2017 myth: it is now a meaningful but not transformative difference. The bigger driver is rate negotiation — an inside-IR35 day rate negotiated up by 15% to absorb employer NI restores parity.

Run the numbers for your own rate and circumstances: Inside vs outside IR35 calculator.

Common mistakes

• Treating CEST as conclusive on borderline roles — corroborate with a status review.
• Blanket SDS across a role family without role-by-role review — fails the "reasonable care" test.
• Ignoring the small client exemption — many genuinely small clients incorrectly issue SDS statements they have no obligation to issue.
• Backdating contracts to fix a status issue — HMRC looks at the actual working arrangement, not the paperwork.
• Substitution clauses on paper but vetoed in practice — fettered substitution carries no weight.
• Using disguised remuneration schemes to dodge an inside determination — guaranteed HMRC challenge.
• Failing to operate the disagreement process within 45 days — the original SDS hardens.
• Forgetting MOO — post-PGMOL it cannot be ignored.
• Mixing inside and outside contracts in the same Ltd without segregating the bookkeeping.
• Pricing a day rate the same inside and outside — inside rates need to be 10-15% higher to absorb employer NI.

gov.uk references

• HMRC Employment Status Manual — ESM10000 onwards covers Chapter 10 in detail.
• ITEPA 2003 Part 2 Chapter 8 — original IR35 (Intermediaries Legislation).
• ITEPA 2003 Part 2 Chapter 10 — off-payroll working in the public sector and large/medium private clients.
• Finance Act 2017 / Finance Act 2020 — the 2017 public-sector and 2021 private-sector reforms.
• Finance (No. 2) Act 2024 — the April 2024 offset rules.
• CEST tool — gov.uk/guidance/check-employment-status-for-tax.
• Key case law: Ready Mixed Concrete v MoP (1968); Atholl House Productions; Kickabout Productions; Northern Light Solutions; PGMOL (SC, 2024).

Bringing it together

For UK contractors in 2025/26 the off-payroll working rules dictate the entire shape of a contract. Identify the client size (small → you still decide; medium/large → they decide). Insist on a properly reasoned SDS. Test the SDS against the three primary status tests, not just CEST. Use the disagreement process if you disagree. Negotiate inside-IR35 rates upwards to absorb employer NI. Keep ordinary outside-IR35 documentation tight — substitution clauses that actually work, multiple clients where realistic, business behaviours visible. And take comfort that the April 2024 offset rules have removed the worst double-tax outcome that drove blanket inside policies after 2021. The market is moving back toward genuine outside-IR35 engagements — but only for contractors who can demonstrate, not just assert, that they are in business on their own account.