IR35 Determination
- Adil Akhtar
- Sep 14
- 12 min read
Understanding IR35 Determination in the UK: The Basics You Can’t Ignore
Why IR35 Still Matters in 2025
Picture this: you’re staring at a new contract for a project in Manchester. The pay looks good, the terms flexible, but one thought lingers—“Am I inside or outside IR35?” That question isn’t just paperwork. Get it wrong, and you could face thousands in unexpected tax bills, penalties, or worse, HMRC scrutiny.
IR35—sometimes called the off-payroll working rules—exists to make sure people working like employees through their own limited companies (personal service companies) pay broadly the same tax and National Insurance as if they were directly employed. For many contractors, freelancers, and even businesses hiring them, determining IR35 status is one of the most important tax checks of the year.
The Legal Backbone and 2025/26 Context
The rules are grounded in the Income Tax (Earnings and Pensions) Act 2003 and clarified through HMRC’s off-payroll legislation. As of the 2025/26 tax year, nothing in the law has fundamentally rewritten IR35—but several related factors shape how heavy the tax impact feels:
● Personal allowance remains frozen at £12,570
● Basic rate 20% applies up to £50,270 in England, Wales, and Northern Ireland
● Higher rate 40% covers £50,271–£125,140
● Additional rate 45% applies above £125,140
In Scotland, the picture is more layered with starter, basic, intermediate, higher, and top bands (GOV.UK).
On National Insurance, thresholds remain frozen, meaning more people are dragged into higher effective deductions. These frozen allowances matter for IR35 because if you fall “inside,” your deemed salary is taxed at these bands just like any employee.
Quick Table: Income Tax Bands 2025/26
Region | Band | Income Range | Rate |
England/Wales/NI | Personal Allowance | Up to £12,570 | 0% |
| Basic Rate | £12,571–£50,270 | 20% |
| Higher Rate | £50,271–£125,140 | 40% |
| Additional Rate | £125,141+ | 45% |
Scotland | Starter Rate | £12,571–£14,732 | 19% |
| Basic Rate | £14,733–£25,688 | 20% |
| Intermediate | £25,689–£43,662 | 21% |
| Higher Rate | £43,663–£75,000 | 42% |
| Top Rate | £75,001+ | 47% |
What Exactly Is “Inside” vs “Outside” IR35?
Here’s the plain English version I often explain to clients:
● Inside IR35: HMRC sees you as effectively an employee. Tax and NI are deducted at source (through PAYE). You can’t claim many of the expenses you might as a contractor.
● Outside IR35: You’re treated as genuinely self-employed. You can take dividends, draw salary tax-efficiently, and deduct allowable business expenses.
It’s not about what you call yourself—it’s about how the contract looks and how the working relationship operates in reality.
HMRC’s Tool: Where to Start
The government provides the Check Employment Status for Tax (CEST) tool. Employers and contractors use it to work out whether IR35 applies.
A couple of real-world observations:
● It’s free and official—so always worth running.
● Record the results—I’ve seen HMRC disputes where having that saved outcome protected a client from back-taxes.
● But it’s not foolproof—CEST has been criticised for being too black-and-white. If your answers fall into grey areas, professional advice is often needed.
How Determination Really Works: The Core Tests
HMRC and the courts don’t just rely on a form. They look at the substance of the relationship. Three key factors dominate:
Control – Who decides how, when, and where you work? If the engager has strong day-to-day control, that leans towards employment.
Substitution – Can you send someone else to do the work? If the answer is no, that’s another pointer to employment.
Mutuality of Obligation (MOO) – Is the engager obliged to keep offering work, and are you obliged to accept it? That’s classic employment.
Beyond these, HMRC considers things like provision of equipment, financial risk, integration into the business, and even whether you appear on company staff lists.
A Client-Inspired Example: The Design Consultant
Take Sarah, a design consultant in Bristol. She had a 9-month contract with a large bank. On paper, the contract said she could substitute another consultant if she wished. But in practice, the bank insisted on her personally attending every design review. When HMRC looked, they concluded the substitution clause was meaningless—she was inside IR35.
Lesson? Contracts matter, but actual working practices matter more.
Why 2025/26 Makes It Trickier
Frozen allowances and thresholds mean more take-home pay is eaten up if you’re inside IR35. Combine that with rising living costs, and I’ve seen more contractors in 2025 feeling the pinch. For business owners, wrongly classifying a worker can trigger liability for unpaid tax, NI, and penalties (GOV.UK).
None of us loves tax surprises, but IR35 errors are some of the costliest ones around.
Step One in Your Own Determination Process
If you’re assessing your own position:
Run CEST and keep a PDF of the result.
Review your contract—does it realistically allow substitution, independence, or financial risk?
Compared with working practices—are you treated like other employees (set hours, company email, team hierarchy)?
Check tax codes and pay—if you’re taxed under PAYE by the engager, you’re almost certainly inside IR35.
At this stage, it’s about spotting warning signs before HMRC does.
Navigating IR35 in 2025 — From Grey Areas to Real-World Application
What’s Changed from April 2025 That You Really Need to Know
Be careful here, because I’ve seen businesses assume the IR35 landscape stayed the same since 2021—but it hasn’t.
● Small-business thresholds have risen. From April 6, 2025, the definition of a “small company” now includes those with:
○ Turnover up to £15 million (previously £10.2 million),
○ Balance sheet total up to £7.5 million (up from £5.1 million),
○ And still 50 employees or fewer. If a client qualifies as small under two of these criteria, they’re not responsible for IR35 status determination—that responsibility shifts back to the contractor’s company.
● Don’t assume the relief is immediate. As HMRC explains, because company status is based on the most recent financial year, and accounts take up to nine months to file, many firms will only benefit from the new thresholds from 2027/28 onwards.
That’s a subtle but vital point—meaning that if you don’t check and plan ahead, you could accept a contract under outdated assumptions.
Deeper into Determinations — Beyond the CEST Tool
You’ve already used HMRC’s Check Employment Status for Tax (CEST); you know it can give "Employment," "Self-employment," or "Unable to determine." It’s updated for clarity as of April 2025—but don’t rely on it alone.
If CEST comes back with “Unable to determine,” here’s your lean-in moment:
● Refer to HMRC’s detailed IR35 guidance under "Off-payroll working (IR35): detailed information"—it’s your go-to manual for handling cases that CEST can’t resolve.
● Weigh up the key criteria again: control, substitution, mutuality of obligation, plus integration, financial risk, and what actually happens day-to-day—not just what’s written.
● Document everything: status determinations, rationale, the contract wording, and actual working patterns. If you’re a fee-payer or client, you must produce a Status Determination Statement (SDS), explain your reasoning, and have a dispute process in place.
A Client Scenario: The Digital Marketer in Glasgow
Let’s call her Liz. She’s taken on a client in Edinburgh who initially classified her as “outside IR35” because the company is small. She ran CEST herself—it said “self-employed.” But here's where things tripped up: in reality, she had to check in daily, used their software and branding, and couldn’t send someone in her place.
CEST didn't help, so she turned to the detailed IR35 guidance and tracked her communications, invoices, and day-to-day instructions. It turned out those patterns pointed inside IR35—so she renegotiated how much 'personal' control she had, inserted true substitution rights, and clarified deliverables wording. That extra documentation saved her from getting hit with back-tax later.
Liability and Tax Offsets — What’s New in 2025?
Another important shift this year makes a real difference for agencies and clients.
Recent HMRC updates now take account of tax already paid by the contractor when calculating any IR35 liabilities. If there’s a misclassification, HMRC should adjust the bill rather than hitting someone with double-tax.
What this means practically:
● If you’re a client or agency with back-tax exposure, HMRC expects you to factor in what the contractor already paid themselves—so the liability may be less than you feared.
● Always keep clear documents showing what’s paid, how much, and by whom, so you can invoke the right offsets.
More Accountability for Clients (Except Small Ones)
If you currently engage contractors and your business does not meet the small-company thresholds, a few rules apply:
You must take “reasonable care” in IR35 determinations. Letting vague clauses or gut instinct guide you won’t cut it; be objective, contract-plus-practice aware, and show your work.
SDS disclosures are mandatory. Your contractor needs to see how you’ve thought things through—and they must be able to dispute it.
You cannot outsource your responsibility. Even through agencies, if you’re not small, you’re the decision-maker.
Checklist: What Every Contractor or Client Needs to Do Now
● Confirm who holds status determination duty—is the client small? If yes, it sits with you; if not, it’s their job.
● Use CEST, keep the PDF, but always follow up with HMRC guidance if it’s inconclusive.
● Document everything: working practices, contract terms, communications, invoices, and decision rationale.
● Ensure SDS is issued (if you’re a client), and challenged if needed (if you’re the contractor).
● Track any tax paid by the contractor, in case offsets apply.
● Repeat assessment whenever working arrangements change, or annually if engagement runs long.
Advanced IR35 Challenges, Complex Scenarios, and Key Takeaways
When You Have More Than One Source of Income
Now, let’s think about your situation. Maybe you’re running a limited company, picking up PAYE work on the side, and also renting out a flat in Birmingham.
This is where IR35 determination gets messy:
● PAYE employment — taxed at source through your employer.
● Contractor work (potentially inside IR35) — if deemed inside, the engager deducts tax/NI before you’re paid.
● Other income (dividends, rental, savings interest) — reported through Self Assessment.
If you’re inside IR35, the deemed payment eats into your personal allowance and higher-rate thresholds, which means your other income could suddenly be taxed at 40% or even 45%.
That’s why I always urge clients: recalculate your full annual tax liability when IR35 applies, not just look at payslips in isolation.
Scottish and Welsh Variations
None of us loves tax surprises, but devolved income tax makes IR35 outcomes different across the UK.
● Scotland — five bands, including a 21% intermediate and a 42% higher rate. That means a contractor inside IR35 may hit higher marginal rates faster than someone in London.
● Wales — broadly mirrors England, but the Senedd can vary rates. As of 2025/26, it hasn’t diverged—but always check for updates before signing contracts.
For business owners hiring contractors across borders, this creates payroll headaches: you need to align the contractor’s tax residence with the correct PAYE treatment.
The Sting of Emergency Tax Codes
Here’s a pitfall I’ve seen trip up more than one client. A contractor moves inside IR35 for the first time, and HMRC assigns an emergency tax code (often 1257 W1/M1).
That code applies personal allowance only for that pay period, not spread across the year. The result? Over-deduction of tax in the early months.
The fix:
● Contractors should check their tax code via their personal tax account.
● If wrong, contact HMRC directly with your UTR and details of the engagement.
● Refunds are usually sorted either in-year or via Self Assessment.
Case Study: The IT Contractor and High Income Child Benefit Charge
Take David, an IT consultant in Leeds earning £95k via his company. In 2025 he took a short contract deemed inside IR35, which pushed his taxable income over £100k.
That triggered two consequences:
Personal allowance tapered down, leaving him with less tax-free income.
His household crossed the £60k threshold, meaning his partner had to repay part of the High Income Child Benefit Charge.
The lesson? IR35 status isn’t just about PAYE deductions. It can ripple into your wider household finances.
Business Owner Traps to Avoid in 2025
For companies engaging contractors, the risks are even greater.
● Failing to issue a Status Determination Statement (SDS) — HMRC can hold you liable for all unpaid tax/NI if you skip this step.
● Blanket determinations — saying “all contractors are inside” is not considered “reasonable care.” Each engagement must be assessed individually.
● Not revisiting determinations — if the contractor’s role evolves, your initial call may no longer be valid.
● Assuming small-company exemption applies immediately — as covered in
Practical Worksheet: Quick Self-Check for Contractors
Here’s a bare-bones checklist you can run through before signing any new contract:
● Have you run CEST?
● Does your contract allow genuine substitution?
● Do you decide how/where/when you work, or does the client?
● Are you taking on financial risk (e.g., fixing errors at your own cost)?
● Can you demonstrate business presence—website, insurance, multiple clients?
● Have you reviewed how this affects personal allowance and thresholds?
● If earning over £60k, have you factored in child benefit clawback?
● If you move inside IR35 mid-year, have you checked for emergency tax codes?
Summary of Important Points
IR35 is about reality, not labels — contracts and working practices must align.
Tax bands are frozen until at least 2028, making IR35 outcomes costlier.
CEST is a starting tool, not the final word; always document reasoning.
Small-company thresholds rose in April 2025, but relief may not apply until 2027/28.
Status Determination Statements (SDS) are mandatory for medium/large clients.
HMRC now accounts for tax already paid when correcting IR35 misclassification.
Scottish tax bands differ — contractors there often hit higher marginal rates faster.
Emergency codes can cause over-deductions — check your personal tax account.
IR35 status affects wider finances — including personal allowance taper and child benefit clawback.
Best defence is documentation — contracts, actual practices, and saved CEST outputs are your protection in disputes.
FAQs
Q1: Can someone working through a Personal Service Company challenge a status decision they disagree with? A1: Well, it’s worth noting that yes—a contractor can dispute a determination if they believe it’s incorrect. In my experience, the key is to articulate exactly where your contract or working pattern diverges from the status given, backed by emails or day-book entries. If that doesn’t resolve it, you can escalate via the client’s dispute process or seek external review. Always do it promptly to avoid retro demand.
Q2: Could a contractor be taxed under an emergency PAYE code mid-year when IR35 status changes? A2: In practice, yes—that happens more often than you'd think. If you switch from outside to inside IR35 mid-year, HMRC may slip you onto an emergency code (like 1257 L W1/M1), which forgets your cumulative allowances. It’s a common mix-up, but the fix is simple: check your personal tax account, challenge the code, and you’ll likely reclaim the overpaid tax via payroll or Self Assessment.
Q3: Does having multiple income streams affect IR35 status or tax liability? A3: In a word—absolutely. If you combine PAYE earnings with IR35-subject income, your marginal rate jumps quickly. One client I advised in Cardiff realised that once the contract income pushed her past a threshold, she lost chunks of allowance and dipped into the higher rate. Track all income sources, re-adjust your tax projections—and, if inside IR35, budget accordingly.
Q4: How does working remotely from Scotland or Wales change IR35 outcomes? A4: Good question—regional tax rates can meaningfully shift your take-home once IR35 kicks in. Scotland’s higher bands can swallow a chunk of income faster, while Wales aligns more with the rest of the UK. I once helped a client in Stirling who thought the rate was ‘just 20%’, only to discover the 21% intermediate band applied—she revised her contract bid immediately.
Q5: What should someone do if CEST returns “unable to determine”? A5: That’s your nudge to go deeper. In those grey zones, you’ll need to analyse working practice versus contract and document your reasoning. Draw a mini-file: note control patterns, correspondence on substitution, and how you choose your schedule. It’s this real-world evidence that protects you—especially if CEST left you in limbo.
Q6: If a client is small, does that mean IR35 doesn’t apply? A6: Not quite. If the client qualifies as a small company, you, the contractor, usually retain determination responsibility. But remember: the exemptions hinge on actual turnover, balance sheet, and staff numbers. I’ve seen firms believe they’re exempt when they aren’t, leading to surprise liability. Always verify the numbers—not just what you were told.
Q7: Does contract length by itself influence IR35 status? A7: No—it doesn’t, though longer-term contracts may draw extra scrutiny. Think of duration as a frame, not a verdict. Courts and HMRC focus on whether the arrangement reads like employment, not how many months it runs.
Q8: How can a contractor account for child benefit clawback when falling inside IR35? A8: It’s often overlooked. As your net income rises inside IR35, you might cross the £50k or £60k thresholds—triggering the High Income Child Benefit Charge. One Yorkshire client discovered this mid-year and had to pay extra via Self Assessment. My tip: recalc household income when status shifts, and budget for that extra hit.
Q9: What happens if a non-UK company hires a UK-based contractor—does IR35 apply? A9: It can, and it often does. HMRC treats you as UK-tax resident, so IR35 still applies even if the client is overseas—unless there’s no UK presence. In disputed cases, seeking specialist advice is key, because cross-border tax rules can muddy the picture quickly.
Q10: Is it ever okay to use “blanket determinations” for multiple contractors? A10: No—that’s risky territory. HMRC expects each engagement to have its own assessment. Bulk decisions flag poor “reasonable care” and potentially shift liabilities onto the client. Stick to one-by-one reviews—however tedious to run.
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