Being self-employed can be exciting and rewarding, offering the freedom to shape your own career, choose projects that inspire you, and work on your own terms. It’s an opportunity to turn your skills and passions into a thriving business while building meaningful client relationships. That said, running your own business also brings its share of challenges. From managing IT and finances to marketing your services and maintaining those client connections; there’s a lot to juggle alongside doing the work you love. And, staying on top of regulations such as GDPR, protecting your rights regarding intellectual property, and navigating complex rules like IR35 can sometimes feel a little overwhelming.
Understanding Different Self-Employment Roles
For context, freelancers, contractors, and consultants are all self-employed professionals, but their roles and working relationships often differ. Freelancers typically work on a project-by-project basis, often with multiple clients, and are common in creative and tech industries. Contractors, meanwhile, usually work with a single client at a time on a fixed-term contract, providing specialised expertise—often in fields like IT, engineering, or construction. Consultants are advisors who provide expert guidance in a particular field, offering strategic solutions to businesses without becoming embedded in day-to-day operations.
Whether you identify as a freelancer, contractor, or consultant—or a mix of all three—or if you’re engaging with these professionals for your business, understanding how regulations like IR35 impact working relationships is crucial. This blog aims to clarify IR35 rules, helping you navigate this important aspect of working independently or collaborating with independent professionals while ensuring compliance and confidence in your approach.
What is IR35?
IR35 rules were first introduced by HMRC to the public sector in April 2000. The goal was to prevent ‘disguised employment, ie someone who fulfils the same role as a permanent employee.
The rules now apply to both public and private sectors to ensure that freelancers/contractors who provide their services through an intermediary, such as a limited company, pay the right amount of tax and national insurance contributions. IR35 also ensures that organisations do not avoid paying Employer’s National Insurance Contributions, Sick Pay, Holiday Pay etc.
Your IR35 status is determined through a series of tests which have been established through case law. UK public sector entities or UK businesses that are classified as medium or large-sized businesses are responsible for IR35 assessments. When the UK business is smaller, or the organisation is based wholly overseas, the responsibility for assessing IR35 status belongs to the contractor/freelancer/consultant.
Determining IR35 status
Three main tests can help you understand whether you fall ‘inside’ or ‘outside’ IR35.
- Personal Service: Is the work you’re doing a personal service, or could you send someone else to do it on your behalf? If you have the freedom to substitute another worker, it suggests you’re running a business rather than being an employee.
- Control: Who’s in charge of how the work is done—you or your client? If you’re in control of how, when, and where you work, you’re more likely to be considered ‘outside’ IR35.
- Mutuality of Obligation (MOO): Is there an expectation that your client will offer you consistent paid work and that you’ll accept it? If so, this might indicate an employer-employee relationship, which could place you ‘inside’ IR35.
Other factors to consider include, whether you take on the financial risk if something goes wrong, whether you work exclusively for one client or multiple clients, whether you use your own equipment, and whether your role is essential to your client’s business operations.
Many of these factors will be detailed in your contract or service agreement.
HMRC provides a free online tool to help you determine whether a contract is inside or outside IR35:
Check Employment Status for Tax (CEST) Tool
What does ‘Inside IR35’ mean?
If your contract is inside IR35, it means that for tax purposes, HMRC views you as working more like an employee than a contractor.
This means you’ll be taxed similarly to an employee in your income bracket, even though you might not have the same legal status or benefits as a regular employee such as paid leave, sick pay, or pension contributions.
An example of being ‘Inside IR35’
Emma is a freelance digital marketing consultant who works exclusively for one large client, managing their social media and advertising campaigns.
The client dictates her work hours, assigns her specific tasks, and expects her to follow their internal processes closely. Emma uses the client’s equipment and doesn’t have the flexibility to substitute another worker if she’s unavailable.
Due to the level of control and lack of business independence, Emma’s contract falls inside IR35.
What does ‘Outside IR35’ mean?
If your contract is considered ‘outside IR35,’ it means that it is one of genuine self-employment, so you have more flexibility in how you manage your income.
You can pay yourself in a tax-efficient way, often through a combination of salary and dividends from your company. This setup allows you to take advantage of lower tax rates on dividends.
However, being ‘outside IR35’ also means you’re responsible for handling all your own taxes, both personal and corporate and making sure they’re paid on time.
While this gives you more control over your finances, it also means you need to stay on top of your tax obligations to avoid any issues.
An example of being ‘Outside IR35’
James is a freelance copywriter who works with multiple clients.
He independently manages his projects, decides his work schedule, and uses his own tools and software.
James has the freedom to subcontract parts of his work if needed and isn’t obliged to accept further work from any single client.
Because of this clear independence in how he operates his business, James’s contracts are considered outside IR35.
Need support?
If you’re struggling with the complexities of self-employment, especially when it comes to understanding and complying with IR35, having the right support can make all the difference.
That’s where IPSE, the UK’s leading membership organisation for independent professionals, comes in. IPSE membership includes advice and guidance, tax and legal helplines discounted contract reviews, and more.
You can explore the different IPSE membership plans here.
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Frequently Asked Questions
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What is the difference between IR35 and off-payroll working?
IR35 and off-payroll working refer to the same set of rules designed to determine whether a contractor is genuinely self-employed or effectively an employee for tax purposes.”IR35 is the commonly used term, while “off-payroll working” is the official language used by HMRC.
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What happens if I disagree with an IR35 determination made by a client?
If you believe your client has incorrectly determined your IR35 status, you have the right to challenge their decision. You should ask them to review the determination and provide reasons for their decision. Unfortunately, in most cases, this will be the end of the matter even if you’re unsatisfied with the client’s response. It may be possible to use your tax return to reclaim overpaid tax; however, this is a complex and uncertain process and is likely to require professional advice.
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How do I calculate my taxes if I’m inside IR35?
If you’re inside IR35, your taxes will be calculated similarly to those of an employee. This includes income tax and National Insurance contributions (NICs). Typically, an umbrella company or recruitment agency will handle these deductions before paying you the remaining income.
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What happens if I’m found to be incorrectly outside IR35?
If your client is a UK-based company which is medium or large in size, they (or the agency if one is present) will be held liable for tax due as a result of an incorrect IR35 determination.
Alternatively, if your client is a small UK-based company, or based wholly overseas, your limited company will be held liable for back taxes, interest, and potential penalties. This could include both income tax and NICs that should have been paid under the correct classification. Tax already paid (corporation tax, dividend tax, and any taxes paid on salary) will be offset against the liability.
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Can I switch between inside and outside IR35 depending on the contract?
Yes, your IR35 status is determined on a contract-by-contract basis. This means that you could have some contracts that are inside IR35 and others that are outside. Each contract should be evaluated separately based on the nature of the work and your relationship with the client.