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Almost every UK contract role states an IR35 status, and it changes how you are paid and what you keep. Here is what inside and outside IR35 mean, who decides, and how to read the status in a job ad.
| Inside IR35 | Outside IR35 | |
|---|---|---|
| What it means | You would be an employee of the client if you were engaged directly, so you are taxed broadly like one | You are genuinely in business on your own account for this contract |
| How you are usually paid | Through an umbrella company or the agency payroll, with income tax and National Insurance deducted | Gross, through your own limited company, which invoices the agency or client |
| Who handles the tax | The fee payer (usually the agency) or the umbrella, before you are paid | Your company pays corporation tax, then you pay personal tax on what it pays you |
| Typical wording in a post | Inside IR35, umbrella, PAYE | Outside IR35, Ltd, limited company |
IR35, also called the off payroll working rules, is the UK tax legislation for contractors who work through their own limited company (a personal service company). It asks one question: if you were engaged directly by the client, would you be its employee? If yes, the contract is inside IR35 and you pay broadly the same income tax and National Insurance as an employee. If no, it is outside IR35.
Public sector clients have made the decision since April 2017. Since 6 April 2021, medium and large clients in the private and voluntary sectors also decide, take reasonable care in doing so, and pass a Status Determination Statement (SDS) with their reasons to you and to the agency. The party that pays your company, usually the recruitment agency and called the fee payer, then deducts tax and National Insurance when the contract is inside. Small private sector clients are exempt: for them, your own company still assesses the contract.
HMRC's CEST tool walks through these questions. It is free and widely used by clients to support their SDS.
Inside IR35, tax and National Insurance are taken from the whole of your pay before it reaches you, usually through an umbrella company, which also takes out the employer costs and its own margin. Outside IR35, your company receives the full invoice, pays its costs and corporation tax, and you decide how to pay yourself. For the same headline rate, the outside contract usually leaves more in your pocket. Our day rate calculator shows both side by side with assumptions you can change.
This guide gives general information based on public sources, not tax, legal or financial advice. Rules and rates change: check GOV.UK and talk to an accountant about your own situation.
See the latest outside IR35 contractsWho decides whether a contract is inside or outside IR35?
For public sector clients, and for medium and large clients in the private and voluntary sectors since 6 April 2021, the client decides and must give its reasons in a Status Determination Statement (SDS). For small private sector clients, your own limited company still makes the assessment.
Which clients count as small?
Small companies are defined by the size thresholds of the Companies Act, based on turnover, balance sheet total and number of employees. A client that is small under those rules is exempt, and the decision stays with your company. The thresholds have changed over time, so check the current figures on GOV.UK.
What is CEST?
Check Employment Status for Tax (CEST) is the free HMRC online tool that gives a view on whether the off payroll working rules apply to a contract. HMRC says it will stand by the result if the information you enter is accurate and the tool is used in line with its guidance.
Can I challenge an inside IR35 decision?
Yes. A client that issues an SDS must have a process to deal with disagreements and must answer within 45 days, either confirming its decision with reasons or changing it.
Does inside IR35 make me an employee of the client?
No. IR35 is about tax. Inside IR35 means you are taxed broadly like an employee, but it does not give you employment rights with the client. If you are paid through an umbrella company, you are that company's employee.
Do outside IR35 contracts pay more?
For the same day rate, an outside IR35 contract usually leaves you more after tax, because your company is not taxed like an employer payroll. That is why inside IR35 day rates are often quoted higher. Compare the two with a calculator rather than at face value.
