IR35 / Off-Payroll Working UK 2026/27: Inside vs Outside, CEST, Liability

IR35 (officially "off-payroll working rules") determines whether a contractor working through an intermediary (typically a personal service company, PSC) should be treated as employed or self-employed for tax purposes. The 2017 public-sector and 2021 private-sector reforms shifted the determination + liability to the end client for medium and large businesses. This guide covers the 2026 rules, who decides, and what each status costs.

The basic question IR35 asks

If you stripped away the personal service company sitting between the worker and the client, would the worker look like a direct employee of the client?

If YES → inside IR35 → tax + NI as if employed (PAYE + Class 1 NI on the contract value, with limited expenses deductible).

If NO → outside IR35 → tax via Corporation Tax + dividends + salary (the traditional contractor tax structure).

Who decides - and who's liable

The reforms shifted both responsibilities. As of 2026:

Worker engaged by	Determination + liability sits with
Public sector body	End client (since April 2017)
Medium/large private sector	End client (since April 2021)
Small private sector	Worker / their PSC (the legacy IR35 regime applies)

A "small private sector" client is one that meets at least 2 of: turnover ≤£10.2m, balance sheet ≤£5.1m, employees ≤50.

If the determination is wrong, the fee-payer in the contract chain (typically the client or the agency they engage through) is liable for the unpaid PAYE + NI. This is why most medium/large clients are very risk-averse about IR35 and tend toward "inside" determinations.

CEST - HMRC's free assessment tool

HMRC provides the Check Employment Status for Tax (CEST) tool at gov.uk/guidance/check-employment-status-for-tax. It walks through a structured set of questions about the working relationship and outputs an indicative status.

CEST is free + widely used. It's also widely criticised:

• Doesn't always cover edge cases (mutuality of obligation in particular).
• Answers can be gamed by either side to push a desired outcome.
• Determinations issued via CEST are NOT binding on HMRC - HMRC can challenge later.

Still, a CEST assessment is the de facto starting point for most determinations.

The factors that matter

UK IR35 case law (Ready Mixed Concrete v Minister of Pensions, Hall v Lorimer, Christa Ackroyd, Atholl House, etc.) settles around several factors:

1 - Mutuality of Obligation (MoO)

Is the client obliged to offer work + the contractor obliged to accept? If yes, MoO suggests employment. If you're free to decline assignments and the client has no obligation to offer them, MoO suggests self-employment.

2 - Personal Service / Right of Substitution

Does the contract allow you to send a substitute? An unfettered right of substitution strongly suggests outside IR35. If the contract says only YOU can perform the work, that's strongly inside.

3 - Control

Does the client direct what, how, when, and where you work? High control → employment. Autonomy over work methods, location, hours → self-employment.

4 - Financial Risk

Do you bear genuine financial risk (e.g. fixed-price contracts where overruns hit your margin)? Or is risk borne by the client (you're paid for time worked regardless)?

5 - Right to provide own equipment

Do you provide your own laptop, software, tools? Or does the client supply everything?

6 - Integration with the client's business

Are you indistinguishable from the client's employees? Same desk, same email, same line manager, attending all-hands meetings? That's strongly inside.

No single factor is decisive - courts look at the whole picture.

Financial impact

Roughly speaking, for a £100,000 day-rate contract:

Outside IR35 (PSC + dividends)

Gross contract:               £100,000
Less corp tax 25% on profit:  £20,000
Plus £12,570 salary (no tax)
Plus £67,430 dividends
Personal tax on £67,430 dividends:
  £500 free (Dividend Allowance)
  £37,200 at 8.75% basic rate dividend tax = £3,255
  £29,730 at 33.75% higher rate dividend tax = £10,034
Total personal dividend tax:   £13,289
Net to contractor (rough):      £66,711

Inside IR35 (taxed as employee)

Gross contract:               £100,000
Less employer NI 15% (paid by contractor's umbrella): £13,043
Net umbrella pay:              £86,957
Less PAYE income tax:          £19,500 (rough)
Less employee NI 8%:           £4,946
Less umbrella margin (£25/week × 52): £1,300
Net to contractor (rough):     £61,211

The difference (~£5,500/year on a £100k contract) is the IR35 cost. For higher-rate contracts this gap widens substantially.

Status Determination Statement (SDS)

When the end client decides your status, they must issue a written Status Determination Statement (SDS) stating:

• Whether the engagement is inside or outside IR35.
• The reasons supporting the determination.

If you disagree, the client must operate a status disagreement process - a formal review within 45 days. They don't have to change their mind, but they must consider your evidence.

The SDS must be issued before the contract starts. Failure to issue an SDS makes the client liable.

Practical contractor responses

Response 1 - Accept inside IR35 status

You work via an umbrella company (the simplest route - the umbrella treats you as their employee for tax purposes, deducts PAYE + NI, pays you net).

Pros: simple, no IR35 risk, full employment rights at the umbrella. Cons: highest tax cost, lowest take-home.

See our umbrella company guide.

Response 2 - Negotiate outside IR35

Push the client to:

• Add an unfettered substitution clause.
• Reduce your integration with their team.
• Increase your autonomy over working methods.
• Make the contract outcome-based (deliverables not hours).
• Allow you to provide your own equipment.

If the client agrees and the working reality matches the contract, an outside-IR35 status is defensible.

Response 3 - Decline the contract

If the client insists on inside IR35 and you have alternatives, the lower take-home may not be worth it. Many highly-skilled contractors moved away from public sector IR35 contracts post-2017 for this reason.

Response 4 - Switch to direct employment

Some contractors take the inside-IR35 status as a signal to negotiate a permanent direct employment offer with the client at a higher salary. Often this works out better than fighting IR35.

What HMRC checks

HMRC's enforcement focus has been:

• Public sector clients whose status determinations look weak.
• Large private sector clients where determinations were rushed in the 2021 transition.
• Specific industries with high contractor concentration (IT, broadcasting, oil & gas, professional services).

HMRC has substantial settled cases against companies (BBC, GSK, Barclays, etc.) for unpaid PAYE + NI on IR35-mis-determined contracts - so end-client risk-aversion remains high.

When to talk to an IR35 specialist

For routine determinations using CEST + standard contract review, DIY is fine. A specialist IR35 lawyer or tax adviser earns their fee when:

• You're disputing a status determination with a major end client.
• You have an HMRC enquiry into past contracts.
• You're considering status insurance (covers some IR35 enquiry costs).
• You operate a PSC + multiple end clients simultaneously and need consistent status determinations.
• You're a client trying to design IR35-compliant engagement processes.

Specialists include: Qdos, Markel Tax, Bauer & Cottrell, Larsen Howie. The Association of Independent Professionals and the Self-Employed (IPSE) offers member resources.

Disclaimer

PayslipIQ provides automated educational guidance based on the figures you supply. It is not regulated tax advice. IR35 determinations depend on the specific facts of each engagement and the end client's risk tolerance. For substantial IR35 issues - especially HMRC enquiries or contested determinations on substantial contracts - use a CTA-qualified or solicitor-qualified IR35 specialist.