IR35 Explained: The Rules in 2026

Last updated: October 2026. Reviewed for the 2026/27 tax year.

IR35 decides whether a freelancer working through their own limited company should be taxed like an employee. It affects how clients engage independent professionals, how much independents take home, and who carries the risk if the decision is wrong.

This guide explains the rules as they stand today, for both clients and independents. We update it every year, so you can be confident you are reading the current position.

In this guide, we use "independents" to mean freelance, interim and fractional professionals.

A note before you read on: The Work Crowd is not an IR35 specialist, and this guide is general information, not tax or legal advice. For IR35 status reviews and specialist advice, we work with our IR35 partner, Qdos. See How we can help at the end of this guide.

What's changed recently

The key changes, newest first:

• April 2026: Umbrella company rules tightened. Agencies and clients can now be held liable if an umbrella company fails to pay the PAYE tax it owes. This affects how inside IR35 workers are paid.
• April 2026: Employment Rights Act 2025 changes began. These do not change IR35, but they make it more important for clients to get engagement models right. Further changes came in from October 2026, with more due in January 2027.
• April 2025: Small company thresholds raised. More clients now count as "small", which moves the IR35 decision from the client to the independent. The change takes time to apply (see Who decides).
• April 2025: Employer National Insurance rose to 15%. This increases the cost of inside IR35 engagements for clients and fee payers.
• April 2024: Offset for IR35 errors introduced. If HMRC finds a client got an IR35 decision wrong, tax the independent already paid can now be offset against what the client owes, reducing double taxation.
• April 2021: Private sector reform. Medium and large private sector clients became responsible for deciding IR35 status. This is still the core of the rules today.

What is IR35?

IR35, also known as the off payroll working rules, was introduced in 2000 to tackle "disguised employment". This is where someone works like an employee in practice but is paid through their own limited company, which usually means less tax and National Insurance is paid.

Each engagement is either:

• Outside IR35: a genuine business to business relationship. The independent can be paid through their limited company in the normal way.
• Inside IR35: the relationship looks like employment. Income tax and National Insurance must be paid as if the independent were an employee, including employer National Insurance.

IR35 is about tax, not employment rights. An independent working inside IR35 is taxed like an employee, but does not become the client's employee.

IR35 applies to people working through an intermediary, usually their own limited company. It doesn't apply to sole traders, but the business engaging a sole trader still needs to be satisfied they are genuinely self employed, and separate rules apply if an agency is involved. Our guide to sole traders and employment status explains how this works.

Who decides?

Who makes the IR35 decision, and who pays if it is wrong, depends on the client.

Medium and large private sector clients, and all public sector bodies

• The client decides whether each engagement is inside or outside IR35.
• It must give the independent, and any agency in the chain, a status determination statement explaining its decision.
• It must take "reasonable care" in making the decision. A blanket decision for all contractors is unlikely to meet this test.
• If an engagement is inside IR35, whoever pays the independent's company (the "fee payer", often the agency) must deduct tax and National Insurance. If the decision is wrong, the liability normally sits with the fee payer or client, not the independent.

Small private sector clients

• The independent's own company decides its IR35 status, and carries the risk if it gets it wrong.
• A client counts as small if it meets at least two of these three: turnover up to £15 million, balance sheet up to £7.5 million, and up to 50 employees.
• These thresholds were raised from £10.2 million turnover and £5.1 million balance sheet in April 2025. Because size is based on previous years' accounts, the change usually takes effect for IR35 from April 2026 or April 2027, depending on the client's year end.
• For groups, the size test applies to the whole group, not just the company you work with.

Clients outside the UK

The off payroll rules do not usually apply where the client has no UK presence. The independent's own company then decides its status. Take advice in these cases, as the rules can be complex.

Who carries the risk at a glance

How an independent is engaged decides which rules apply, who makes the status decision and who pays if it turns out to be wrong.

For more on the sole trader routes, see our guide to sole traders and employment status.

Inside or outside: how status is decided

There is no single test. HMRC and the courts look at the whole picture, but three factors carry the most weight.

1. Substitution

Can the independent send someone else with the right skills to do the work? A genuine, unfettered right to send a substitute points strongly away from employment. A clause in the contract that the client would never actually accept carries little weight.

2. Control

Who decides how, when and where the work is done? A client that sets the outcome and leaves the method to the independent looks like a business relationship. A client that directs day to day tasks, hours and location looks more like employment.

3. Mutuality of obligation

Is the client obliged to keep offering work, and the independent obliged to accept it? Genuine independents work to a defined scope, not ongoing availability.

Beyond the big three: look like a business, act like one

Control, substitution and mutuality are the headline tests, but HMRC also looks at the wider picture.

• Use your own kit. Your own laptop and tools signal you are in business.
• Stay outside the staff structure. Don't line manage client employees, join staff appraisals or appear on the org chart.
• Carry your own risk. Have your own insurance, price your work, and fix your own mistakes at your own cost.
• Keep a pipeline. Work for more than one client, or actively market your services.

Working practices matter as much as the contract

A well written contract is not enough on its own. HMRC looks at how the engagement actually works day to day. If the contract says one thing and reality says another, reality wins.

Warning signs a role may be inside IR35

• Long engagements, especially 12 months or more, full time and embedded in a team
• Little real control over how or when the work is done
• No genuine right of substitution
• An internal job title, line management responsibilities or a seat on the staff org chart
• Rolling extensions with no clear end point or defined deliverables

Tools

HMRC's Check Employment Status for Tax (CEST) tool gives a quick view. Many specialists consider it limited, particularly on mutuality of obligation, so for important or borderline roles a specialist review is safer.

Status determination statements and how to challenge one

Where a medium or large client decides IR35 status, it must issue a status determination statement (SDS) before the engagement starts. The SDS must state the decision and the reasons for it, and go to the independent and the next party in the chain, such as the agency.

If you are an independent and disagree

1. Ask the client for its reasons and the evidence it used, if these are not clear.
2. Raise a formal disagreement with the client, explaining why you think the decision is wrong. Include any evidence about how you actually work.
3. The client must respond within 45 days, either confirming its decision with reasons or issuing a new SDS.

HMRC is not involved in this process. If the client stands by its decision, your options are usually to accept the rate and terms for an inside IR35 engagement, or to negotiate changes to how the role is set up.

If you are a client

• Assess each role individually, based on how the work will actually be done
• Record your reasoning and the evidence behind it
• Review the decision if the role changes, for example after an extension or a change in scope
• Have a clear, timely process for handling disagreements

A specialist IR35 review can help on either side, especially for senior, long or borderline roles.

If a role is inside IR35

An inside IR35 decision does not stop the engagement going ahead. It changes how the independent is paid. The usual options are:

• Umbrella company: the independent becomes an employee of an umbrella, which runs PAYE and pays them. This is the most common route.
• Agency or client payroll: the agency or client pays the independent directly through its own PAYE.
• Deemed payment through the independent's company: the fee payer deducts tax and National Insurance before paying the independent's limited company. This is less common, and the money usually cannot then be used for normal company expenses or dividends.

Umbrella companies: the April 2026 rules

Since 6 April 2026, if an umbrella fails to pay the PAYE tax it owes, HMRC can recover it from the agency or client further up the chain. A licensing regime for umbrellas is also expected in 2027.

• Independents: choose an umbrella accredited by a recognised body such as FCSA or Professional Passport, check every payslip, and avoid any umbrella promising unusually high take home pay.
• Clients and agencies: check umbrellas carefully before using them, and keep checking while workers are placed. Checks reduce the risk but cannot remove it.

For more on umbrellas, see our guide to sole trader, limited company and umbrella options.

IR35 and the Employment Rights Act 2025

The Employment Rights Act 2025 is the biggest change to UK employment law in a generation, phased in from April 2026 to 2027. It does not change IR35, but it changes the wider picture for how organisations engage people.

Genuine outside IR35 engagements are not directly affected. A properly set up independent is not an employee, does not gain unfair dismissal rights, and ending the contract is not a dismissal.

Fixed term contracts are different. Someone on a fixed term contract is on the client's payroll and is an employee. From January 2027, employees gain unfair dismissal protection after six months, and the cap on compensation is removed. Ending a fixed term contract after six months will need a fair reason and a proper process.

The real risk is misclassification. If a role labelled "outside IR35" looks like employment in practice, it could be challenged on tax (inside IR35) and, in more serious cases, on employment status. This makes clear scopes, genuine independence and regular reviews more important than ever.

Don't replace staff with contractors doing the same job. Dismissing an employee and replacing them with a contractor doing the same work is restricted under the Act.

For a fuller picture, download our Employment Rights Act 2025 guide.

Day rates inside and outside IR35

The same day rate is worth much less to an independent inside IR35 than outside it.

• Outside IR35: the independent's company receives the full rate and manages its own tax, expenses and pension.
• Inside IR35: income tax and employee National Insurance are deducted. Where the independent is paid through an umbrella, employer costs are often taken out of the rate too, including employer National Insurance at 15% and holiday pay.

For independents: agree up front whether a quoted rate is inside or outside IR35, and whether employer costs come out of it. Many independents keep two rates, with a higher one for inside IR35 work.

For clients: expect to pay more for an inside IR35 role to attract the same talent. Be clear about IR35 status from the start, as a change partway through the hiring process often loses good candidates.

Common questions

Does IR35 apply to sole traders?

No. IR35 applies to people working through an intermediary, usually their own limited company. But a client engaging a sole trader directly still needs to be satisfied they are genuinely self employed, and if an agency is involved, HMRC's agency rules apply. See our guide to sole traders and employment status.

Is a substitution clause in my contract enough?

Not on its own. The right must be genuine: the client must realistically accept a suitably skilled substitute, and you would find and pay them. A clause that would never be used in practice carries little weight.

Can I be inside IR35 for one client and outside for another?

Yes. Every engagement is assessed separately. You can work through your limited company for outside IR35 roles and through an umbrella for an inside IR35 role at the same time.

My client is small. Will I get a status determination statement?

No. Small clients are outside the off payroll rules, so your own company decides its status and carries the risk. You should still assess each engagement and keep a record of your reasoning.

How far back can HMRC look?

Usually up to four years, extending to six years if errors were careless and up to 20 years if deliberate.

Who pays employer National Insurance on an inside IR35 role?

Legally, the fee payer (often the agency or client). In practice, when an independent is paid through an umbrella, employer costs are usually built into the rate, so check how your rate is structured.

Does an inside IR35 decision make me an employee of the client?

No. IR35 is about tax only. It does not give you employment rights with the client. If you are paid through an umbrella, you are the umbrella's employee.

Does the Employment Rights Act 2025 give freelancers new rights?

Not to genuine independents working outside IR35. Its changes mainly affect employees, including those on fixed term contracts.

What if my client is based outside the UK?

The off payroll rules usually do not apply where the client has no UK presence, so your own company decides its status. The rules can be complex, so take advice.

How we can help

IR35 reviews and specialist advice: Qdos

We are not IR35 specialists, so we work with Qdos, our IR35 partner. Qdos can carry out IR35 reviews of a role or contract and provide further specialist advice, for clients and independents. Find out more about Qdos.

Finding the right talent: The Work Crowd

The Work Crowd connects organisations with experienced freelance, fractional and interim professionals across communications, marketing, brand, public affairs, sustainability and commercial leadership. Every professional in our community is vetted and reference checked, and contracts, statements of work, timesheets and invoices are managed on our platform.

We help clients think through not just who they need, but how best to engage them, and we will point you to Qdos when a role needs a specialist IR35 view.

• Clients: find a freelancer or interim or get in touch
• Independents: join The Work Crowd community