IR35 and Off-Payroll Working in 2026/27: The Complete Guide

What IR35 is and why it exists

IR35 is the common name for the Intermediaries Legislation, introduced in April 2000 and now sitting in the Income Tax (Earnings and Pensions) Act 2003. It targets one specific arrangement: a person supplying their work through an intermediary, almost always their own limited company, in circumstances where they would be an employee of the client if that company did not exist. Parliament's concern was never contracting itself. It was the tax saved when employment income is repackaged as company profit and drawn as dividends, which carry no National Insurance.

The test the legislation applies is hypothetical. You construct an imaginary direct contract between the worker and the end client, strip out the personal service company, and ask whether that notional contract would be one of employment. If yes, the engagement is inside IR35 and the income is taxed broadly as salary. If no, it is outside IR35 and the company is taxed as a genuine business. HMRC's overview of the regime is published in its guidance on understanding off-payroll working.

Two parallel sets of rules now do this job. Chapter 8 of Part 2 ITEPA 2003 is the original IR35, where the contractor's own company assesses status and accounts for the tax. Chapter 10 is the off-payroll working regime layered on top from 2017, which shifts assessment and liability up the chain to the client and the fee-payer. Which chapter applies to a given engagement depends almost entirely on the size of the client, and that boundary moved on 6 April 2026.

Inside or outside: what the labels actually mean

An outside IR35 engagement is treated as business-to-business trade. The company invoices the client, pays corporation tax on its profit at 25%, or 19% where profits fall within the small profits band with marginal relief between £50,000 and £250,000, and the contractor typically draws a modest salary plus dividends. An inside IR35 engagement is treated as disguised employment. The fee for the work is subjected to PAYE income tax and National Insurance before it reaches the contractor or the contractor's company, with no employment rights attached in return.

The tax difference in numbers

The gap narrowed when dividend tax rose, but it has not closed. From 6 April 2026 dividends are taxed at 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band, above a £500 dividend allowance. The previous 8.75% and 33.75% rates ended on 5 April 2026. Inside IR35, income instead suffers employee National Insurance at 8% on the main band and 2% above the upper limit, on top of income tax through the personal allowance of £12,570 and the frozen higher rate threshold of £50,270. The fee-payer also bears employer National Insurance at 15% above the £5,000 secondary threshold, a cost that in practice depresses the rate offered for inside roles.

Status therefore changes take-home pay materially at typical contract rates, which is why the question deserves more care than a gut feeling. The mechanics of running a company on either footing are covered in the outside IR35 contracting guide and the inside IR35 guide.

Who determines status from April 2026

Since April 2021, medium and large private sector clients have been responsible for assessing each engagement and issuing a status determination statement, an SDS, with the conclusion and the reasons for it. Public sector bodies have carried that duty since 2017. Where the client is small, Chapter 8 applies instead and the contractor's own company makes the call and carries the liability.

On 6 April 2026 the size thresholds rose to £15 million turnover and £7.5 million balance sheet total, aligned with the Companies Act definitions, with the 50-employee test unchanged. Around 14,000 engagers moved from medium to small as a result, and the contractors working for them took back both the determination and the liability. If your client sits anywhere near those figures, the small-company threshold guide explains how to confirm its size and when the switch takes effect for your contract.

The SDS and the 45-day disagreement window

Where the client does decide, the contractor is not without recourse. A client-led disagreement process lets the worker or the deemed employer challenge an SDS, and the client must respond within 45 days with either a fresh determination or reasons for standing by the original. If it misses that deadline, liability for the tax rests with the client. A reasoned challenge, built on the contract and the working practices rather than on frustration, succeeds far more often than a bare objection.

How tax is collected on an inside engagement

Under Chapter 10, the fee-payer, usually the agency closest to the contractor's company, treats the invoiced fee net of VAT and allowable materials as a deemed direct payment. It operates PAYE on that amount, deducting income tax and employee National Insurance and paying employer National Insurance on top, then passes the net sum to the contractor's company. Money that has already been taxed this way can be drawn from the company without further income tax.

Under Chapter 8, the company itself performs a deemed employment payment calculation at the year end, working out the tax and National Insurance that would have been due on the engagement income after a fixed 5% allowance for running costs, an allowance that survives only in the small-client situations where Chapter 8 still applies. Since April 2024, set-off rules have also allowed HMRC to credit tax already paid by the worker and their company against a Chapter 10 liability assessed on a fee-payer, removing the double taxation that previously made settlements punitive.

A short history: 2000 to 2026

The rules have been redrawn four times, and each redraw moved responsibility around the supply chain. Knowing which regime governed which tax year matters in disputes, because HMRC can assess years long past.

• April 2000: the Intermediaries Legislation takes effect. Contractors' own companies assess every engagement and bear the liability.
• April 2017: Chapter 10 arrives for the public sector. Public bodies determine status and the fee-payer operates PAYE on inside engagements.
• April 2021: Chapter 10 extends to medium and large private sector clients. Small clients stay under the original rules.
• April 2024: the PAYE offset rules begin, crediting tax already paid by the worker and their PSC against fee-payer liabilities.
• April 2026: the small-company thresholds rise to £15 million turnover and £7.5 million balance sheet, returning around 14,000 engagers to contractor-led assessment, and a separate joint and several liability regime begins for umbrella arrangements.

The 2026 umbrella reform is a different statute solving a different problem, but it lands on the same population of workers. It is covered separately in the umbrella joint and several liability guide.

How status is judged: the tests behind the label

No statute defines employment for this purpose, so the courts do. The framework comes from Ready Mixed Concrete in 1968, which asks three questions: does the worker provide personal service, is there mutuality of obligation, and is there a sufficient framework of control. Only if all three are present does the tribunal weigh the other terms to see whether they are consistent with employment.

Modern cases have refined each limb. The Supreme Court's 2024 decision in PGMOL, concerning football referees, confirmed that mutuality of obligation can exist within each individual engagement even where neither side must offer or accept future work. Atholl House in the Court of Appeal emphasised the in-business-on-your-own-account factors, looking at the worker's wider activity, financial risk and how they market themselves, while Kickabout Productions shows how an obligation on the client to offer work points towards employment. The practical upshot is that a genuine right of substitution, limited client control over how the work is done, and visible business risk remain the strongest outside indicators, examined in depth in the status tests guide.

HMRC's Check Employment Status for Tax tool applies a simplified version of this case law. HMRC stands by a CEST result where the inputs are accurate, but the tool sometimes returns an undetermined outcome, and using it does not by itself discharge the duty to take reasonable care. Treat it as one piece of evidence, not a verdict.

Who the rules do not touch: sole traders and office holders

IR35 only bites where there is an intermediary between the worker and the client. A sole trader contracting directly has no intermediary, so neither Chapter 8 nor Chapter 10 applies. The client instead faces the ordinary employment status question: if the relationship is really employment, the client should have operated PAYE from the start, and the risk sits with the client rather than the worker. Some businesses refuse to engage sole traders for exactly that reason.

Office holders are the opposite case. A person appointed to an office, such as a statutory directorship at the client, is automatically within the rules for the income from that office, whatever the contract says and however the day-to-day relationship operates. A contractor asked to sit on a client's board should take advice before accepting, because the appointment changes the tax analysis on its own.

Common myths that still mislead contractors

• A well-drafted contract settles it. Tribunals look at the reality of the working relationship, and a substitution clause that would never be honoured carries little weight.
• Short contracts are automatically outside. Length is a minor factor. A three-month engagement under tight client control can be inside, and a multi-year arrangement with genuine autonomy can be outside.
• Inside IR35 brings employment rights. It does not. Deemed employment is a tax outcome only, with no holiday pay, sick pay or unfair dismissal protection attached.
• A clean CEST result ends the matter. HMRC honours an accurate CEST output, but the tool can return undetermined, and careless inputs unwind the protection entirely.
• Once outside, always outside. Status attaches to each engagement, and working practices drift. A contract that started outside can become inside as the client absorbs the worker into its teams.
• HMRC can only look back a year or two. Assessment windows run to four years ordinarily, six where the loss arose carelessly, and twenty where it was deliberate.

Getting your position right

For most contractors the work splits into three tasks: establish who determines status on each engagement after the April 2026 threshold change, gather evidence that the working practices match the contract, and keep records that would survive an enquiry years later. Penalties scale with behaviour, from nothing where reasonable care was taken, up to 30% of the lost tax for carelessness and more for deliberate understatement, so the paperwork done now sets the outcome later.

A specialist accountant can review a contract and the surrounding working practices before signature, which is far cheaper than defending a determination after the fact. An independent IR35 contract review is the usual starting point, and where a client's SDS looks wrong, support with status determination disputes puts the 45-day disagreement process to proper use.