IR35 Explained — 2025/26 Guide
Updated for the 2025/26 tax year
IR35 is the UK tax legislation that determines whether a contractor is genuinely self-employed or effectively an employee for tax purposes. If you work through a limited company or partnership, IR35 decides how much tax and National Insurance you pay.
Inside vs Outside IR35
Inside IR35means HMRC considers you a “disguised employee.” Tax and NI are deducted at source, similar to PAYE. Outside IR35 means you are genuinely self-employed and can take income as salary + dividends through your limited company.
| Factor | Inside IR35 | Outside IR35 |
|---|---|---|
| Income tax | Deducted at source (PAYE rates) | Salary + dividends strategy |
| Employee NI | 8% on £12,570–£50,270, 2% above | Only on low salary (e.g. £12,570) |
| Employer NI | 13.8% above £9,100 | 13.8% on salary only |
| Dividend tax | N/A | 8.75% / 33.75% / 39.35% |
| Corporation tax | N/A | 19–25% on profits |
| Expenses | 5% flat-rate deduction only | Claim all allowable expenses |
The Three Key Tests
HMRC uses three main tests to decide IR35 status. You need to demonstrate that you fail at least one to be outside IR35:
- Substitution: Can you send someone else to do the work? If yes, this points outside IR35.
- Control: Does the client control how, when, and where you work? If they dictate these, it points inside.
- Mutuality of Obligation (MOO): Is the client obliged to offer work and are you obliged to accept it? If no, this points outside.
CEST Tool
HMRC’s Check Employment Status for Tax (CEST) tool is the official online questionnaire. It asks about your working arrangements and gives a determination. While not legally binding, it is the starting point for any IR35 enquiry. Clients in medium/large businesses must use it (or equivalent) to issue a Status Determination Statement (SDS).
Worked Example: £500/day Contractor
Scenario: £500/day, 220 working days = £110,000 gross
Inside IR35:
- Gross: £110,000
- 5% expense deduction: −£5,500 → deemed pay £104,500
- Employer NI (13.8% above £9,100): −£13,165
- Deemed salary: £91,335
- Income tax: ~£23,553
- Employee NI: ~£3,814
- Take-home: ~£63,968
Outside IR35:
- Gross: £110,000
- Allowable expenses (accountant, travel, equipment): −£5,000
- Salary: £12,570 (tax-free)
- Employer NI on salary: £479
- Corporation tax (25% on £92,430): £23,108
- Dividends available: ~£69,322
- Dividend tax: ~£5,017
- Take-home: ~£76,875
Difference: ~£12,907 more outside IR35
Practical Tips
- Get a contract review from an IR35 specialist before starting.
- Keep evidence of substitution rights, your own equipment, and project-based work.
- Don’t rely solely on CEST — it has been criticised for bias toward “inside” determinations.
- If caught inside IR35, consider umbrella employment for simplicity.
- IR35 insurance (from ~£200/year) can cover investigation costs.