Inside IR35 means your contract is treated as employment for tax: you pay broadly the same Income Tax and National Insurance as an employee would, usually deducted before you're paid, with none of the tax efficiency of running a business. Outside IR35 means you're genuinely in business on your own account, taxed as a business, and free to pay yourself in the usual company way. In short, the label decides how much of your day rate you keep — and, since 2017/2021, often who gets to make the decision isn't you. Here's what each actually means, and how the line is drawn.
This is general information about how the UK off-payroll (IR35) rules work, not legal or tax advice. IR35 is a UK rule; other countries classify contractors differently. Your status depends on your real working arrangement, and rates change — take professional advice on your own position.
What "inside" and "outside" IR35 mean
IR35, or the off-payroll working rules, exists to make sure a contractor working through their own company "pays broadly the same Income Tax and National Insurance as an employee would" when they'd really be an employee but for the company in between (gov.uk).
- Inside IR35 ("caught"): HMRC views the engagement as disguised employment. The fee is taxed broadly like employment income — Income Tax and employee National Insurance apply, typically deducted at source — so your take-home is closer to a permanent employee's than a business owner's, but usually without employment rights like holiday or sick pay.
- Outside IR35: HMRC accepts you're genuinely in business on your own account. Your company is paid in full, and you draw money from it in the normal way, keeping the commercial and tax flexibility of running a business.
The practical effect is on your net pay: the same headline day rate generally leaves you with less in your pocket inside IR35 than outside. Exactly how much less depends on the route you're paid through and the current tax and NI rates, so use HMRC guidance or an up-to-date calculator rather than a rule of thumb — and never assume last year's figure still holds.
How status is actually decided
Status isn't chosen — it's determined by the reality of the working arrangement, weighed across the same factors behind HMRC's Check Employment Status for Tax (CEST) tool:
| Factor | Leans inside IR35 | Leans outside IR35 |
|---|---|---|
| Personal service | You must do the work yourself | Genuine right of substitution |
| Control | Client sets how/when/where you work | You decide how the work is delivered |
| Mutuality of obligation | Rolling duty to offer/accept work | Engaged for a defined project or outcome |
| Being in business | Integrated like an employee | Own risk, equipment, multiple clients |
A genuine right of substitution is one of the strongest pointers outside, because employees must work personally. No single factor settles it — HMRC and the courts look at the whole picture, and the written contract only helps if it matches what actually happens day to day.
Who decides — and who carries the risk
This is the part that changed. Since the off-payroll reforms (public sector from April 2017, private sector from April 2021), the responsibility for determining status often sits with the client, not the contractor:
- Public-sector clients, and medium or large private-sector clients: the client decides your status and issues a Status Determination Statement.
- Small private-sector clients: your own company (intermediary) remains responsible for the decision, as before.
Source: gov.uk off-payroll guidance (last updated 26 February 2026). The "small company" exemption uses the statutory company-size test — confirm the current thresholds before relying on them. The shift matters because an over-cautious client may default everyone to "inside" to reduce its own risk, even where the working reality points outside. Knowing the factors lets you have an evidenced, professional conversation about how the engagement really works.
What this means for how you work
Because status follows reality, the way to stand genuinely outside IR35 is to genuinely operate as a business: a real right of substitution you could exercise, control over how you deliver, defined deliverables rather than an open-ended role, your own tools, and ideally more than one client. None of that is about clever contract wording; it's about whether you're in business on your own account or filling a chair. Getting the contract and the working practices aligned is what survives scrutiny.
This is the practical work the IFA's standards and B2B contract framework are built around — helping members evidence that they operate as genuine independent businesses. To be clear: no membership, badge or framework can put you "outside IR35" or guarantee a status outcome — only your real arrangement can. What good structure does is help a genuine position be a defensible one.
Common mistakes
- Assuming the contract decides it. Working practices override the paperwork if they conflict.
- Thinking "outside" is always better. Outside IR35 carries more responsibility and risk; for a short, employee-like engagement, inside may simply reflect reality.
- Quoting an old take-home figure. Tax and NI rates change — check a current source before you plan around a number.
- Treating a client's blanket determination as final. You can ask how the decision was reached and present evidence of how the work really operates.
- Carrying UK IR35 abroad. A non-UK engagement is classified under that country's rules, not IR35.
The bottom line
Inside vs outside IR35 comes down to one question — are you genuinely in business, or effectively an employee for this engagement? — and that question is answered by how you actually work, not by the label on the contract or who you'd like to be. Get the working reality right, evidence it, and the status follows. That's the difference worth getting right, because it's the difference in what you keep.
Frequently asked questions
What is the difference between inside and outside IR35? Inside IR35 means HMRC treats your contract as employment for tax, so you pay broadly the same Income Tax and National Insurance as an employee, usually deducted at source. Outside IR35 means you're genuinely in business on your own account and taxed as a business. The main practical difference is your take-home pay from the same day rate.
What does outside IR35 mean? It means HMRC accepts that you're genuinely running a business rather than being a disguised employee for that engagement — typically because you control how you work, can send a substitute, carry business risk, and aren't integrated like an employee. Your company is paid in full and you draw income from it in the usual way.
Who decides whether I'm inside or outside IR35? For public-sector clients and medium or large private-sector clients, the client decides (since April 2017 and April 2021 respectively) and issues a Status Determination Statement. For small private-sector clients, your own company remains responsible for the determination.
How much do you lose inside IR35 on a £500 day rate? There's no single figure — it depends on how you're paid (for example via an umbrella or a deemed payment) and the current Income Tax and National Insurance rates. As a direction of travel, inside IR35 leaves you with noticeably less net pay than outside on the same rate. Use HMRC guidance or an up-to-date calculator rather than a fixed percentage.
Does IR35 apply outside the UK? No. IR35 is a UK rule. Other countries decide contractor status with their own tests — for example the US uses the IRS and Department of Labor tests and state rules such as the ABC test. Don't apply IR35 to a non-UK engagement.