Accounting glossary

IR35 (off-payroll working rules)

What IR35 covers, the 2026 inside-vs-outside determination, and how the 2021 off-payroll changes shifted responsibility to medium and large UK end clients.

By ExpenseFlow team
· 18 May 2026

Definition

IR35 is the UK HMRC tax legislation that determines whether a worker providing services through their own limited company (a personal service company or PSC) should be treated as an employee for tax purposes. The name comes from the Inland Revenue press release IR35 issued in March 1999, which announced the original rules. Since 6 April 2021, the off-payroll determination has shifted to the end client for medium and large private-sector engagements (it was already with the end client for public-sector engagements since April 2017). The 2024 Autumn Statement maintained the existing framework with no major reform.

What IR35 means in practice

For a UK bookkeeper supporting a personal service company contractor, IR35 is the determination that shapes the tax efficiency of the whole engagement. An outside-IR35 engagement lets the contractor’s company invoice normally, pay corporation tax on the profit, and distribute via a mix of low salary and dividends (the tax-efficient pattern for owner-managed companies). An inside-IR35 engagement forces the fee-payer to deduct PAYE and NIC from each payment, eliminating the tax efficiency.

The end client uses HMRC’s Check Employment Status for Tax (CEST) tool or commissions an independent IR35 review to make the determination. The determination is communicated to the contractor and any agency in the chain via a Status Determination Statement (SDS). The contractor has the right to challenge the determination through a client-led disagreement process; HMRC can ultimately review on enquiry.

A practical example: a UK contractor works through their PSC on a 12-month engagement with a large bank. The bank determines the engagement is inside-IR35 (the role has supervised hours, no substitution rights, and provided equipment, all of which point to employment). Each monthly invoice of 10,000 from the PSC is paid net of PAYE (roughly 2,400) and NIC (roughly 800), so the PSC receives 6,800. The 6,800 sits as revenue in the PSC and can be distributed as salary or dividend, but the PAYE and NIC have already been suffered, so the additional tax efficiency of doing so is minimal. The contractor’s effective take-home rate is close to what it would be as a permanent employee.

How IR35 works by country

United Kingdom

Originated as the Intermediaries Legislation in Chapter 8 of the Income Tax (Earnings and Pensions) Act 2003. The public-sector off-payroll rules (Chapter 10 ITEPA) came into force from April 2017, shifting determination from the worker to the end client for public-sector engagements. The same shift extended to medium and large private-sector engagements from 6 April 2021. Small private-sector clients (turnover under 10.2m, balance sheet under 5.1m, fewer than 50 employees) remain under Chapter 8 with the worker still determining their own status.

The 2024 Autumn Statement maintained the existing IR35 framework with no major reform. Earlier proposals to repeal the 2021 off-payroll changes were dropped in late 2022.

Australia

Australia does not have a direct IR35-equivalent. The Personal Services Income (PSI) rules in Division 84-87 of the ITAA 1997 are the closest analogue: they restrict the use of personal service companies to convert employment-type income into corporate income. PSI rules apply if more than 50% of income from a single client is for the worker’s personal services. The framework is narrower than IR35 (it focuses on income attribution rather than employment status) but the underlying concern is similar.

Canada

Canada does not have a direct IR35-equivalent. The Personal Services Business (PSB) rules under the Income Tax Act target a similar avoidance pattern: corporations whose business is providing the services of a single individual (who would be the corporation’s employee but for the existence of the corporation) are taxed at the full corporate rate without the small business deduction. The CRA’s PSB determination tests are similar in concept to the UK CEST tool.

New Zealand

New Zealand does not have IR35. The “attribution rule” for personal services entities under section GB 27 of the Income Tax Act 2007 has similar intent but narrower scope: it attributes income from a personal services entity back to the underlying individual where specific tests are met.

Singapore

Singapore does not have an IR35-equivalent. The IRAS “income shifting” provisions apply in egregious cases but no equivalent off-payroll framework exists. Owner-managed Singapore companies face less tax-driven scrutiny on the employment-versus-contractor distinction than UK businesses.

IR35 sits at the intersection of UK income tax and employment status:

  • PAYE is the income-tax regime that an inside-IR35 engagement is taxed under.
  • NIC is the social-contribution regime that runs alongside PAYE.
  • Payroll is the broader process that captures inside-IR35 deductions.

See also

For the UK payroll regime that inside-IR35 deductions feed into, see the payroll and PAYE entries.

FAQ

See the answered questions above for inside vs outside, who decides, and inside-IR35 consequences.

Questions, answered

Common questions

What's the difference between inside-IR35 and outside-IR35?

Inside-IR35 means the engagement is determined to be employment-like for tax purposes: the worker pays PAYE and NIC on the payment as if they were an employee, even though they invoice via a limited company. Outside-IR35 means the engagement is a genuine business-to-business relationship: the worker's company invoices for the services, pays corporation tax on the profit, and the worker takes salary and dividends from their company. Outside is materially more tax-efficient; inside removes that efficiency.

Who decides if an engagement is inside or outside IR35?

Since 6 April 2021 in medium and large private-sector engagements, the end client determines IR35 status using HMRC's Check Employment Status for Tax (CEST) tool or an independent IR35 review. The determination is communicated to the worker and any agency in the chain. Small companies (turnover under 10.2m, balance sheet under 5.1m, fewer than 50 employees) and public-sector engagements have their own framework.

What happens if my engagement is determined inside-IR35?

The fee-payer (typically the agency or end client) deducts PAYE and employee NIC from each payment to your personal service company. The deductions are reported to HMRC under the off-payroll regime. Your company receives the net payment but cannot extract dividends from it without further tax (the deemed-employment payment under Chapter 10 has already been taxed). The net effect is similar to being an employee, with limited room for tax optimisation.

Keep exploring

PAYE (Pay As You Earn)

The UK and New Zealand income-tax collection system in which employers deduct income tax and (in the UK) National Insurance Contributions fr

NIC (National Insurance Contributions)

The UK social-insurance contribution withheld from employee wages alongside PAYE income tax, paid by both employees (primary NIC) and employ

Payroll

The end-to-end process of calculating employee pay (salary, wages, overtime, bonuses, allowances), withholding income tax and social contrib

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