Understanding IR35
IR35 (also known as the off-payroll working rules) is legislation designed to tax contractors who work in a similar manner to employees but operate through their own limited company. If HMRC determines you are "inside IR35," your income is taxed as if you were an employee, including employer NI deductions from your fee.
Inside vs Outside IR35
Inside IR35, your client (or agency) deducts PAYE income tax, employee NI, and employer NI from your contract payments before paying you. Outside IR35, you invoice through your limited company and can extract profits via a combination of salary and dividends, which is typically more tax-efficient due to lower dividend tax rates and the ability to claim expenses.
Frequently Asked Questions
Who decides my IR35 status?â–¾
For medium and large private sector clients, the end client is responsible for making the IR35 determination using HMRC's CEST tool or their own assessment. For small private sector clients, the contractor remains responsible. The determination should consider factors like control, substitution rights, and mutuality of obligation.
Can I claim expenses inside IR35?â–¾
Inside IR35, you can only claim a very limited 5% flat-rate deduction for expenses from the deemed payment. You cannot claim travel, equipment, or other typical business expenses against the deemed employment income. This is one of the main financial disadvantages of being inside IR35.
Should I increase my rate if caught by IR35?â–¾
Many contractors negotiate a rate increase of 20-30% to compensate for the additional tax burden when a contract is determined to be inside IR35. This helps maintain a similar take-home pay. Some contractors also consider umbrella companies as an alternative to operating through their Ltd company inside IR35.
Calclypso Editorial Team
Tax calculations verified against HMRC 2025-26 rates. Last updated: April 2026. This calculator is for estimation purposes only.