IR35 and Off-Payroll Working: A Contractor's Guide
IR35 decides whether HMRC treats your engagement as genuine self-employment or as disguised employment. Getting it right protects your take-home pay and keeps you compliant.
What IR35 actually is
IR35 (the off-payroll rules) is anti-avoidance legislation that tests whether a contractor working through their own limited company is, in substance, an employee of the client. It targets engagements where the company structure exists mainly to reduce tax.
IR35 is about how you actually work day to day, not just what your contract says.
Inside vs outside IR35
"Inside IR35" means HMRC treats the engagement like employment, so it is taxed via PAYE with no limited-company tax efficiency. "Outside IR35" means you are genuinely self-employed through your own limited company and can plan tax efficiently.
- Inside: taxed under PAYE, employee-style deductions
- Outside: salary plus dividends at 8.75%, 33.75% and 39.35%, with a £500 dividend allowance
- Both share the £12,570 personal allowance
Who decides your status
For medium and large clients, the client determines status and must issue a Status Determination Statement (SDS). For small clients, your own company makes the decision and carries the responsibility.
HMRC's CEST tool can help you and the client assess status, though it is not the final word.
Compare the structures on your day rate
How much you keep depends on whether you are inside or outside IR35 and how you split salary and dividends. Use the calculator below to model your own day rate before deciding on a structure.
Corporation Tax runs from 19% to 25%, so profit level changes the maths too.
What would you actually take home?
Profit available before the director's salary and Corporation Tax — drag to your figure.
- Director salary (PA)£12,570
- Employer's NIC−£1,136
- Corporation Tax−£19,118
- Dividends drawn£67,176
- Dividend tax−£13,078
Effective tax rate 33% after Corporation Tax, on the optimal low-salary-plus-dividend mix. A pension contribution typically lowers this further.
Sole trader keeps the most at £100,000 profit
At this level a sole trader keeps roughly £2,643 more — the limited-company advantage widens as profits rise and when you don't draw everything.
- Salary to the £12,570 personal allowance, the rest as dividends — no NIC on dividends.
- An employer pension contribution would push the 33% effective rate lower still.
- Dividends need retained profit and proper paperwork to be lawful.
- Gross profit£100,000
- Income tax−£27,432
- Class 4 NIC−£3,257
- Net to you£69,311
- Director salary (PA)£12,570
- Employer's NIC−£1,136
- Corporation Tax−£19,118
- Dividends drawn£67,176
- Dividend tax−£13,078
- Net to you£66,668
- Assignment rate£100,000
- Employer's NIC + margin−£14,530
- Income tax−£21,620
- Class 1 NIC−£3,720
- Net to you£60,130
Illustrative estimate for a standalone company, England/Wales/NI, drawing all profit, with no other income or pension. Your position may differ.
Umbrella vs limited company
Through an umbrella company you are employed by the umbrella and taxed under PAYE, which suits short or clearly inside-IR35 work. Running your own limited company gives more tax planning room but only makes sense for genuinely outside-IR35 engagements.
- Umbrella: simple, PAYE, no company admin
- Limited: dividends and profit-extraction planning, but more responsibility
- Class 4 NIC for the self-employed is 6% then 2% above the upper limit
Staying compliant
Compliance rests on two things: a contract that reflects genuine self-employment and working practices that match it. Keep evidence of substitution rights, control over how you work and absence of mutuality of obligation.
If your contract says outside but you work like an employee, HMRC looks at the reality.
Common questions
Does the client always decide my IR35 status?
Only for medium and large clients, who must issue an SDS. If the client is small, your own limited company decides and is responsible for getting it right.
Is an umbrella company the same as being inside IR35?
No. An umbrella employs you and taxes you under PAYE regardless of IR35, while IR35 is a status test applied to work done through your own limited company.
Can I rely on the CEST tool?
CEST is a useful starting point and HMRC will stand by a result given honest inputs, but it does not cover every situation, so it should not be your only check.
Get expert eyes on your tax
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For guidance only — this factsheet does not constitute professional advice and is not a substitute for advice based on your specific circumstances. Whilst every care has been taken in its preparation, it may contain errors for which we cannot be responsible. Figures are for the 2025/26UK tax year (England, Wales & Northern Ireland) and may change. Last reviewed 6 June 2026.