What IR35 is about
IR35 is about contractors who work through their own limited company. If the contractor would be treated as an employee were it not for their company, the engagement is "inside IR35", and broadly the same income tax and National Insurance is paid as for an employee. If they're genuinely in business on their own account, it's "outside IR35".
The rules that decide who makes that call, and who pays the tax, are called the off-payroll working rules.
Who makes the decision
Public sector organisations decide the status of the contractors they engage. Medium and large private sector organisations have done the same since April 2021. For a small private sector client, the contractor's own company makes the decision instead.
A private sector company counts as medium or large for these rules if it meets two or more of these conditions:
- turnover of more than £15 million
- a balance sheet total of more than £7.5 million
- more than 50 employees
These thresholds apply for financial years beginning on or after 6 April 2025. A company's size only changes once it has met, or stopped meeting, the conditions for two financial years in a row, so for most businesses the earliest a change can take effect is the 2027 to 2028 tax year. If you're near the line, check with your accountant.
If the decision is yours
As the client, you need to:
- take reasonable care when deciding the status
- give a Status Determination Statement, with your decision and the reasons for it, to the contractor and to the business you contract with, which is usually the agency
- have a way for the contractor to disagree, and reply within 45 days, keeping your original decision in place while you look at it again
- keep records of your decisions and the reasons
If you don't give a statement with reasons, or don't take reasonable care, the tax liability can move to you.
HMRC's Check Employment Status for Tax tool can help you reach a decision. Answer it based on how the work will really be done.
Working practices count, not just the contract
HMRC looks at how the work is actually done. Who controls how, when and where the work happens, whether the contractor could genuinely send someone else in their place, and whether they're treated like a member of staff all matter. A limited company, a Statement of Work or a contract that says "outside IR35" doesn't settle it on its own.
If the work or the way it's done changes during an assignment, look at the decision again.
Who pays the tax on an inside IR35 role
When a role is inside IR35 and the contractor works through their own limited company, the business that pays that company is the "fee-payer". The fee-payer deducts income tax and National Insurance before paying the contractor's company, and pays employer's National Insurance. Where there's an agency in the chain, that's usually the agency.
How umbrella companies fit in
Many inside IR35 contractors don't use their own limited company at all. They're employed by an umbrella company, which runs PAYE and pays them as an employee.
Because the umbrella company employs the contractor, the off-payroll rules don't strictly need a status decision from you for that worker. In practice, we still ask clients to confirm in writing that the role is inside IR35, so everyone is clear why the umbrella route is being used.
An umbrella contractor's pay comes out of the assignment rate after the umbrella's costs, which include employer's National Insurance, the Apprenticeship Levy and the umbrella's own fee, and then normal income tax and employee National Insurance. That's why contractors look closely at the rate and their take home pay. Agencies have to give them a Key Information Document showing how it's worked out before they agree terms.
The April 2026 change for umbrella companies
Since 6 April 2026, the agency that supplies a worker through an umbrella company is jointly and severally liable for any PAYE the umbrella company fails to pay. Where there's no agency and the client contracts directly with the umbrella company, the client carries that liability. HMRC can pursue the agency first. The government also took a power to apply the same approach to National Insurance.
What it means for you:
- If you take on umbrella contractors through an agency, ask the agency how it chooses and checks the umbrella companies it uses.
- If you contract with umbrella companies directly, the liability sits with you, so your own checks matter.
We engage inside IR35 contractors through an established umbrella company that we contract with directly, and we hold that relationship, so you deal with us rather than the umbrella company.