IR35 Explained for Freelancers: What It Is and How It Works

This guide explains IR35 in plain English: what it is, who it affects, how status is decided, what changes if you are caught by it, and the practical steps freelancers can take to stay on the right side of the rules.

What is IR35?

IR35 is the common name for the UK’s off-payroll working rules, also known as the intermediaries legislation. It is designed to tackle “disguised employment”, where someone works like an employee but is paid through their own company, which can mean paying less tax and National Insurance than a regular employee would.

The idea is that if you would be classed as an employee of your client if you did not have a limited company, you should pay broadly the same tax as an employee. If you are genuinely in business on your own account, the rules do not change how you are taxed.

It is worth knowing that IR35 is not a tax in itself, and it is not a blanket rule against limited companies. It is a test of the working relationship, applied contract by contract.

Who does IR35 apply to?

IR35 can apply to freelancers, contractors and consultants who supply their services through an intermediary, most commonly their own personal service company (PSC). If you invoice clients as a sole trader, the rules do not apply in the same way, although other employment status considerations still matter.

You might be affected if you:

• Provide services through your own limited company
• Work for clients directly or via an agency
• Take on longer-term or repeat engagements that look a lot like a regular job

The rules do not depend on your job title or industry. Designers, developers, writers, consultants, editors and production crew can all be affected, depending on how they actually work.

Inside IR35 vs outside IR35

These two phrases come up constantly, so it helps to be clear on them.

Outside IR35 means the engagement is a genuine business-to-business relationship. You continue to be paid through your company and can take income in the tax-efficient way you normally would, typically a mix of salary and dividends.

Inside IR35 means the engagement is treated as employment for tax purposes. Tax and National Insurance must be accounted for on the fees you receive, much as if you were on the client’s payroll, though without the benefits of employment such as paid holiday or sick pay.

The label applies to the individual contract, not to you as a person. You could have one engagement that is outside IR35 and another that is inside at the same time.

Who decides your status?

This depends on who the client is.

Medium and large private sector clients, and all public sector clients: the client is responsible for deciding your status and must give you a status determination, along with reasons. If the engagement is inside IR35, the fee-payer (the client or the agency paying you) deducts tax and National Insurance before paying you.

Small private sector clients: the responsibility stays with you. You assess your own status and, if inside IR35, account for the tax through your own company.

Whether a client counts as small depends on criteria around turnover, balance sheet total and number of employees, and these are set out in HMRC guidance. It is sensible to ask a new client early on which category they fall into.

If a client gives you a determination you disagree with, you can challenge it. Clients are expected to have a process for considering disagreements and to respond within a set timeframe.

How is IR35 status decided?

There is no single tick-box test. Status is judged on the reality of how you work, not just what the contract says. A well-drafted contract helps, but if your day-to-day working looks like employment, the contract will not save you.

The main factors usually considered are:

Control

Does the client decide what you do, how you do it, where and when? A genuine business tends to have much more say over its own methods. If you are told exactly how to carry out your work and when to be available, that points towards employment.

Substitution

Can you send someone else to do the work in your place, and does the client genuinely have to accept them? A real right of substitution is a strong sign of self-employment. A clause that exists on paper but would never be used in practice carries little weight.

Mutuality of obligation

Is the client obliged to offer you work, and are you obliged to accept it? In employment, there is usually an ongoing expectation of work and pay. In genuine freelance arrangements, each engagement is more of a standalone project.

Financial risk

Do you carry real business risk? For instance, do you fix your price, correct poor work at your own cost, or provide your own equipment? Being paid regardless of the outcome, with no risk of loss, looks more like employment.

Part and parcel of the organisation

Are you embedded in the client’s team, with a company email address, line management and a place in the organisation chart? Or do you operate as an outside supplier? The more integrated you are, the more it looks like employment.

Right of termination, notice and other signals

Other factors, such as being entitled to notice periods, being treated as a staff member for benefits or having a long, open-ended engagement, can also influence the outcome.

No single factor settles the question. Decision-makers look at the full picture.

What happens if you are inside IR35?

If an engagement is caught, the main practical effects are:

• Tax and National Insurance are applied to the fees, usually through the fee-payer’s payroll, so you receive net pay
• You lose some of the flexibility and efficiency of paying yourself through salary and dividends for that income
• Your take-home pay for that contract will generally fall compared with an outside IR35 engagement at the same day rate

Because of this, many freelancers negotiate their rate based on the status of the role. An inside IR35 engagement often needs a higher rate to deliver comparable take-home pay.

Your company will still need to deal with the paperwork correctly, including how deemed or taxed income is reported. If you are unsure how to treat it, an accountant familiar with IR35 can save you from costly mistakes.

Common IR35 myths

“A limited company means I’m automatically outside IR35.” No. The structure does not determine status, the working relationship does.

“My contract says I’m outside, so I’m fine.” Not necessarily. HMRC and clients look at how the work happens in practice.

“IR35 only affects IT contractors.” It affects any freelancer working through an intermediary, in any sector.

“A substitution clause is enough.” Only if it is real and could actually be used.

“If the client says I’m inside, I have no choice.” You can challenge a determination you think is wrong, and you should if you have good reasons.

Practical steps to stay on the right side of IR35

Here are some sensible habits that help freelancers manage IR35 risk without losing sleep.

1. Read the contract before signing. Check it reflects how you will genuinely work, including substitution, control and deliverables.
2. Ask about the client’s size and who is determining status. Do this at the start, not after the work begins.
3. Request a written status determination where the client is responsible, and make sure it includes reasons.
4. Work the way the contract says. If practice drifts into something that looks like employment, the original paperwork will carry less weight.
5. Keep records. Emails, statements of work, invoices and notes on how decisions are made can all support your position if status is questioned.
6. Use project-based scopes where possible. Clear deliverables and outcomes usually sit more naturally with genuine self-employment than open-ended availability.
7. Present as a business. Use your own equipment, carry appropriate insurance, market yourself and work for multiple clients where you can.
8. Review regularly. Long engagements can change over time, so revisit your status if your role evolves.

Should you use an online tool to check status?

HMRC provides an online tool called Check Employment Status for Tax (CEST), which can help give a view on an engagement. It is a helpful starting point, but it is not the last word, and some freelancers find it does not capture the nuances of their situation. For anything borderline or high value, professional advice is a sensible investment.

Making IR35 part of your wider planning

IR35 is not just a compliance matter. It affects how you price work, how you plan your income, how you decide between contracts and how you structure your business. Some freelancers choose to move to umbrella arrangements for inside IR35 work, others adapt their working practices to genuinely operate outside, and some reconsider whether a limited company is right for them at all.

If you work in a particular sector, such as creative, media or production, the nature of your engagements can raise specific questions. You can see how we support different types of independent workers on our Freelancers page, and if compliance is your main concern, our Compliance service covers the practical side of keeping things in order.

The bottom line

IR35 comes down to a simple question: are you really in business on your own account, or are you effectively an employee working through a company? The answer depends on control, substitution, financial risk and how integrated you are with your client, judged on the reality of the arrangement rather than the paperwork alone.

Understand how the rules work, get status determinations in writing, keep good records and work in a way that matches your contracts, and IR35 becomes something you manage rather than something you fear.

Not sure where you stand with IR35? If you would like a clear view on your contracts, your status or how the rules affect your take-home pay, book a discovery call and we’d be happy to help.