If you're an IT contractor operating through a limited company, IR35 is probably the most important piece of tax legislation affecting you. Yet it remains one of the most widely misunderstood. Here's a plain-English breakdown.
What is IR35?
IR35 is a set of rules designed to stop "disguised employment" — where someone does the work of an employee but structures their arrangement through a limited company to pay less tax. If HMRC determines that you're working like an employee, they can require you to pay income tax and National Insurance as if you were employed.
Inside vs outside IR35
Being outside IR35 means your working arrangement is genuinely that of an independent contractor. You control how and when you work, you're not integrated into the client's business, and you bear financial risk.
Being inside IR35 means HMRC considers you to be effectively an employee of your client. Your income from that contract is taxed at employment rates.
Who decides?
Since April 2021, for medium and large private sector clients, the end client determines your IR35 status. For small companies and direct clients, the responsibility sits with you.
Make sure every contract you work under is reviewed with IR35 in mind. Your working practices matter just as much as the contract wording. If you're unsure, take advice before you sign.