IR35, the off-payroll working rules, applies when you work through your own limited company for a client you would otherwise be an employee of. Public sector and medium or large private sector clients decide your status. If you are inside IR35, whoever pays your company must deduct income tax and National Insurance as if you were employed.
For small private sector clients, your own company still decides and, if the rules apply, operates them itself (HMRC). The rules exist so that someone working like an employee pays broadly the same tax and National Insurance as an employee would.
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IR35 key facts for 2026/27
| Question | Answer | Source |
|---|---|---|
| Who decides status for public sector clients? | The client | HMRC |
| Who decides for medium or large private sector clients? | The client | HMRC |
| Who decides for small private sector clients? | Your own company (the intermediary) | HMRC |
| What makes a private company medium or large? | Two or more of: turnover over £10.2 million, balance sheet over £5.1 million, more than 50 employees | HMRC ESM10006 |
| Higher thresholds from 6 April 2025 | £15 million turnover and £7.5 million balance sheet, for financial years starting on or after 6 April 2025; earliest effect on IR35 is 2027/28 | HMRC ESM10006a |
| Deadline for the client to answer a disagreement | 45 days | HMRC |
| Employer NI paid by the deemed employer | 15% above £5,000 a year | HMRC |
The question IR35 asks
Take away your limited company. If the working relationship between you and the client would look like employment, you are inside IR35. If it would look like a business serving a customer, you are outside.
- Inside IR35: the fee paid to your company is treated as employment income. Income tax and employee National Insurance are deducted before the money reaches your company, and the deemed employer pays employer National Insurance and, if it applies, the Apprenticeship Levy (HMRC).
- Outside IR35: your company is paid in full. It pays corporation tax on its profit, and you pay tax on the salary and dividends it pays you.
Who decides, and what they must do
A public sector or medium or large private sector client must:
- take reasonable care when deciding your status;
- give you, and whoever it contracts with, a Status Determination Statement (SDS) with its reasons, whether the answer is inside or outside;
- have a process for disagreements and respond within 45 days. If it does not respond in time, it becomes responsible for your income tax and National Insurance (HMRC).
The fee-payer is the business in the chain that pays your company, often an agency. If you are inside IR35, it is the deemed employer and runs the deductions.
The client size test in 2026/27
A company is medium or large if it meets two or more of the conditions (turnover over £10.2 million, balance sheet over £5.1 million, more than 50 employees) for two consecutive financial years (HMRC ESM10006). From 6 April 2025 the Companies Act raised two of these thresholds to £15 million and £7.5 million. They apply to financial years beginning on or after 6 April 2025 and, because of the timing of accounts, HMRC says the earliest tax year they can change a client's size for IR35 is 2027/28 (HMRC ESM10006a).
Check Employment Status for Tax (CEST)
HMRC's CEST tool asks questions about the working arrangement and gives a result. HMRC says it will stand by the result as long as the information given is accurate and the tool is used in line with its guidance (HMRC). A result is only as good as the answers: if the working reality differs from what was entered, HMRC can challenge it.
The factors that decide status
Courts look at the whole picture. The factors that come up most often are:
- Control. Does the client decide what you do, how, when and where?
- Personal service and substitution. Must you do the work yourself, or can you send a suitably qualified substitute and pay them?
- Mutuality of obligation. Must the client offer work and must you accept it?
- Financial risk. Do you bear the cost of putting mistakes right or quote fixed prices that can lose money?
- Integration. Are you part of the client's organisation, with its line management, email and staff benefits?
- Equipment. Do you provide your own?
No single factor settles it. The written contract matters, but only if it matches how the work actually happens.
Worked example: inside IR35 in 2026/27
Your company invoices £400 a day for 220 days, £88,000 in the year, excluding VAT. The client decides you are inside IR35. You live in England.
| Line | Calculation | Amount |
|---|---|---|
| Deemed employment payment | £400 × 220 | £88,000 |
| Income tax: basic rate | (£50,270 − £12,570) × 20% | £7,540.00 |
| Income tax: higher rate | (£88,000 − £50,270) × 40% | £15,092.00 |
| Employee NI: main rate | (£50,270 − £12,570) × 8% | £3,016.00 |
| Employee NI: above the UEL | (£88,000 − £50,270) × 2% | £754.60 |
| Paid to your company after deductions | £88,000 − £26,402.60 | £61,597.40 |
| Employer NI, paid on top by the deemed employer | (£88,000 − £5,000) × 15% | £12,450.00 |
Rates and thresholds from HMRC, Rates and thresholds for employers 2026 to 2027. The example assumes a standard 1257L code, no other income and no pension contributions, and works on annual figures; in practice PAYE is applied each time your company is paid.
Employer NI is the deemed employer's cost, not a deduction from the fee. In practice many clients and agencies reflect it when agreeing the day rate.
Outside IR35, for comparison
If you are outside IR35, your company receives the full £88,000. It pays corporation tax on its profit: 19% on profits of £50,000 or less, 25% above £250,000, with marginal relief in between (HMRC). Dividends you then take are taxed at 10.75%, 35.75% or 39.35% for 2026/27 above a £500 dividend allowance (HMRC). The net result depends on your salary, expenses and how much you draw, so there is no single comparison figure.
If you disagree with the decision
- Ask the client for the Status Determination Statement and its reasons if you have not had them.
- Tell the client in writing why you disagree, with evidence of how the work is actually done.
- The client must respond within 45 days, either confirming its decision with reasons or changing it. The original decision applies while it considers yours.
- You can raise a disagreement until the last payment for the engagement is made.
Frequently asked questions
What does inside IR35 mean?
It means the client has decided you would be an employee if your limited company were taken away. The business that pays your company must then deduct income tax and employee National Insurance from the fee and pay employer National Insurance on top.
Who decides whether I am inside IR35?
For public sector clients and medium or large private sector clients, the client decides and must give you a Status Determination Statement. For small private sector clients, your own company decides.
Is the HMRC CEST tool binding?
HMRC says it will stand by a CEST result as long as the information entered is accurate and the tool was used in line with its guidance. If the real working arrangements differ from the answers given, the result can be challenged.
How long does a client have to respond if I disagree with my IR35 status?
45 days from receiving your disagreement. If it does not respond in time, it becomes responsible for the income tax and National Insurance on your fees.
What makes a private company small for IR35 in 2026/27?
A private company is medium or large if it meets two or more of these for two consecutive financial years: turnover over £10.2 million, balance sheet over £5.1 million, more than 50 employees. Otherwise it is generally small. Higher Companies Act thresholds of £15 million and £7.5 million apply to financial years starting on or after 6 April 2025, with the earliest effect on IR35 in 2027/28.
Sources
All sources were opened and checked by PayslipIQ on 21 September 2026.
- HMRC (GOV.UK): Understanding off-payroll working (IR35). Who decides and what the deemed employer deducts. Verified 21 Sep 2026.
- HMRC (GOV.UK): Off-payroll working for clients. SDS, reasonable care and the 45-day disagreement rule. Verified 21 Sep 2026.
- HMRC (GOV.UK): ESM10006 and ESM10006a. Client size tests and the 2025 threshold changes. Verified 21 Sep 2026.
- HMRC (GOV.UK): Check employment status for tax. Verified 21 Sep 2026.
- HMRC (GOV.UK): Rates and thresholds for employers 2026 to 2027. Tax bands and NI rates. Verified 21 Sep 2026.
- HMRC (GOV.UK): Corporation Tax rates and Tax on dividends. Verified 21 Sep 2026.
Disclaimer
PayslipIQ provides educational guidance based on published HMRC guidance. It is not regulated tax or legal advice. Employment status turns on the facts of each engagement. For a disputed determination or an HMRC enquiry, take advice from a qualified tax adviser or employment lawyer.
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Check my payslip freePayslipIQ provides educational information and estimated calculations only. It does not provide tax, legal, financial, payroll, accounting, pension, benefits or employment advice. Always verify your payslip, tax code, deductions and take-home pay with your employer's payroll department, HMRC, your pension provider, a qualified accountant, tax adviser or another appropriately qualified professional.