IR35 Explained: What Contractors and Freelancers Need to Know
If you contract through your own limited company, IR35 status affects almost everything about how much you take home — yet it’s still one of the most misunderstood areas of UK contracting. This guide from Filing Accounts UK explains what IR35 actually means, who decides your status, and what changed in 2026, using only verified facts based on the Income Tax (Earnings and Pensions) Act 2003 and current HMRC guidance.
At Filing Accounts, we support contractors and freelancers with company accounts and tax planning around IR35.
What Is IR35?
IR35 — officially the off-payroll working rules — exists to catch “disguised employment”: situations where someone works through a limited company (usually called a Personal Service Company, or PSC) but the actual working relationship looks just like a normal employee’s. Where that’s the case, HMRC requires broadly the same Income Tax and National Insurance to be paid as an equivalent employee would pay.
Crucially, IR35 status is assessed per engagement, not per person. You can have one contract that’s outside IR35 and another, running at the same time, that’s inside — your status depends entirely on how each specific working relationship actually operates.
Inside vs Outside IR35
| Outside IR35 | Inside IR35 | |
|---|---|---|
| How you’re taxed | As a genuine business — Corporation Tax, salary, dividends | Broadly like an employee — PAYE Income Tax and NIC |
| Who operates PAYE (if inside) | N/A | The fee-payer, often the agency or an umbrella company |
| Employment rights (holiday, sick pay, pension)? | N/A — you’re self-employed | Generally no, despite tax being similar to an employee’s |
| Take-home pay | Generally higher | Generally lower for the same gross income |
Being inside IR35 is a genuine source of frustration for many contractors: you’re taxed similarly to an employee, without receiving employee benefits like holiday or sick pay in return.
Who Decides Your Status?
This depends entirely on the size of the client you’re contracting for:
- Small private sector clients: your own company remains responsible for assessing your status and accounting for any tax due.
- Medium and large private sector clients, and public sector bodies: the client decides your status and must issue a Status Determination Statement (SDS) explaining the decision. If your engagement is found inside IR35, the fee-payer (often the recruitment agency) operates PAYE before your company receives payment.
You have the right to challenge an SDS you disagree with, and the client must respond to a formal disagreement.
The 2026 Small Company Threshold Changes
A client counts as “small” under Companies Act 2006 criteria — and therefore exempt from making the status decision itself — if it meets at least 2 of 3 conditions for 2 consecutive financial years. From 6 April 2026, these thresholds rose:
| Criteria | Old Threshold | New Threshold (from 6 April 2026) |
|---|---|---|
| Annual turnover | £10.2 million | £15 million |
| Balance sheet total | £5.1 million | £7.5 million |
| Average employees | 50 | 50 (unchanged) |
This means more clients now qualify as “small,” shifting the responsibility for IR35 status back onto the contractor’s own company for those engagements. There’s an important timing catch, though: a client’s size is judged on its most recently filed accounts, and the new thresholds only apply to financial years starting on or after 6 April 2025. In practice, this means a client that’s currently medium or large is unlikely to newly qualify as “small” for IR35 purposes until around the 2027/28 tax year — don’t assume a client has dropped out of scope just because their turnover happens to sit under the new limits today.
Overseas Clients: A Case Where the Rules Flip Back
If your end client is based wholly overseas with no UK presence at all, responsibility for determining your status typically falls back to your own company, even if the client would otherwise count as medium or large. This is a genuine exception that catches contractors working for international clients off guard.
Factors That Influence Status
There’s no single test — HMRC and tribunals look at the overall working relationship, including:
- Control — how much say the client has over what, how, when, and where you work
- Substitution — whether you could genuinely send a substitute to do the work in your place
- Mutuality of obligation — whether the client is obliged to offer work and you’re obliged to accept it
Working through a limited company doesn’t automatically put you outside IR35 — status depends on the real working relationship, not just the paperwork or the label on your contract.
Common Mistakes to Avoid
Assuming Your Limited Company Automatically Means You’re Outside IR35
The corporate structure alone proves nothing — what matters is how the engagement actually works day to day.
Assuming a Client Has Dropped Out of Scope Too Early
The new small-company thresholds have a built-in lag — check based on filed accounts, not this year’s turnover alone.
Not Challenging an SDS You Disagree With
You have a right to challenge a client’s status determination — don’t assume it’s final.
Forgetting Overseas Clients Are a Special Case
A wholly overseas client with no UK presence can shift status determination back to your own company, even at large-client scale.
Frequently Asked Questions
Who decides if I’m inside or outside IR35?
For small clients, you (via your company) decide. For medium/large clients, the client decides and issues a Status Determination Statement.
Can I be inside IR35 on one contract and outside on another?
Yes. Status is assessed per engagement, not per person.
What happened to the small company size thresholds in 2026?
They rose from 6 April 2026 — turnover from £10.2m to £15m, balance sheet from £5.1m to £7.5m — meaning more clients now qualify as small, though with a delay before this affects existing engagements.
Do I get holiday pay if I’m inside IR35?
Not automatically. Being inside IR35 affects how you’re taxed, not your employment rights, which is a common source of contractor frustration.
Need Help With Your IR35 Position? Talk to Filing Accounts UK
At Filing Accounts, we help contractors and freelancers understand their IR35 position and plan their company accounts and tax accordingly.
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