The Off-Payroll Working Rules, commonly known as IR35, ensure that contractors pay similar Income Tax and National Insurance as employees. These rules prevent individuals from working as “disguised employees”, meaning they benefit from self-employed tax perks while functioning as full-time staff.
Who Does IR35 Apply To?
IR35 applies to 3 main groups:
- Contractors who provide services through an intermediary, such as a Personal Service Company (PSC)
- Clients (end hirers) who engage contractors
- Agencies that supply workers through intermediaries
IR35 applies when a contractor qualifies as an employee while working directly with the client.
When Does IR35 Apply?
The rules apply based on the size of the client:
- In the Private Sector, the client determines the worker’s employment status
- In the Medium or Large Private Sector, the client is responsible for IR35 assessments
- In the Small Private Sector, the contractor remains responsible for their own tax status
A small company meets at least 2 of these conditions:
- Turnover of less than £15,300,000
- Balance Sheet total of less than £7,500,000
- Fewer than 50 employees
From 6th April 2025, more companies will qualify as “Small”. However, the shift of IR35 responsibility back to contractors for these companies will take effect from 6th April 2026, as company size is based on the previous financial year.
How to Determine Contractor Status
A contractor’s IR35 status depends on these factors:
- Control – Does the client dictate how, when and where work is done?
- Mutuality of Obligation – Is there an expectation for ongoing work?
- Substitution – Can the contractor send someone else to do the work?
HMRC’s “Check Employment Status for Tax” (CEST) tool can help assess status.
What Happens If IR35 Applies?
If IR35 applies, contractors pay taxes like employees. The client or agency deducts Income Tax and National Insurance before payment. The employer also pays Employer’s National Insurance Contributions and, if relevant, the Apprenticeship Levy.
What Changes in April 2025?
The new Companies (Accounts and Reports) Regulations 2024 redefine small companies, meaning 14,000 companies will no longer be responsible for IR35 assessments. Contractors working with these firms will regain responsibility for their IR35 status from April 2026.
What This Means for Contractors
- Contractors must assess their own status
- Increased flexibility in how contracts are structured
- Greater risk of HMRC investigations if compliance is poor
What This Means for Businesses
- Less administrative burden when hiring contractors
- More hiring flexibility without IR35 liability concerns
- A need to review hiring policies to reflect new regulations
Compliance Checks and Tax Avoidance Schemes
HMRC has increased compliance checks on businesses using contractors. Incorrect assessments can lead to hefty tax bills and penalties. Additionally, HMRC warns against tax avoidance schemes that claim to bypass IR35. Contractors should conduct due diligence before engaging with any umbrella company or payroll provider.
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