IR35 Project Management
- Adil Akhtar
- 36 minutes ago
- 16 min read
Getting Your IR35 Foundations Right
Why IR35 Still Matters in 2025/26
Picture this: you’re lining up your next contract, the day rate looks healthy, and the client seems easy to work with. Then someone drops the question: “But are you inside or outside IR35?” If your heart sinks at that, you’re not alone.
IR35 — or the off-payroll working rules — determines whether you’re effectively working like an employee (and should therefore pay Income Tax and National Insurance through PAYE), or whether you’re genuinely self-employed through your limited company.
As of April 2025, the rules have had another shake-up. Contractors once again shoulder more responsibility, especially where their clients qualify as small businesses under the updated Companies Act thresholds. That means your project management isn’t just about delivering milestones — it’s about making sure you, your client, and HMRC see the engagement in the same light.
For the government’s baseline, see: Understanding off-payroll working (IR35).
The Core Question: Who Decides Your Status?
Until April 2025, medium and large businesses had to determine whether a contractor fell inside IR35. But the Finance Act changes increased the small-business thresholds from April 2025:
● Annual turnover: now under £15 million
● Balance sheet total: under £7.5 million
● Number of employees: fewer than 50
If a client meets two or more of these, they’re a “small business”. In those cases, the responsibility for determining IR35 status shifts back onto you as the contractor.
If the client is medium or large, they must issue a Status Determination Statement (SDS). You can read the official government position here: Check employment status for tax (CEST).
2025/26 Income Tax Rates That Apply Inside IR35
Why does status matter so much? Because the tax bite is very different.
Here are the England, Wales, and Northern Ireland rates for 2025/26:
Band | Income Range | Tax Rate |
Personal Allowance | Up to £12,570 | 0% |
Basic Rate | £12,571 – £50,270 | 20% |
Higher Rate | £50,271 – £125,140 | 40% |
Additional Rate | Over £125,140 | 45% |
Source: Income Tax rates and allowances.
And here are the Scottish bands for 2025/26:
Band | Income Range | Tax Rate |
Starter Rate | £12,571 – £14,876 | 19% |
Basic Rate | £14,877 – £26,561 | 20% |
Intermediate Rate | £26,562 – £43,662 | 21% |
Higher Rate | £43,663 – £75,000 | 42% |
Advanced Rate | £75,001 – £125,140 | 45% |
Top Rate | Over £125,140 | 48% |
If you’re inside IR35, your fee-payer (the client or agency) will deduct PAYE and employee National Insurance at source, leaving you with payslips just like a regular employee. But you don’t get the benefits of employment (no holiday pay, sick pay, or redundancy protection). That’s why managing this carefully is essential.
The National Insurance Twist
From 6 April 2025, employee NIC rates are:
● Class 1 NIC (employees): 8% on earnings between £12,570 and £50,270; 2% above that.
● Employer NIC: 13.8% on earnings above £9,100.
Inside IR35, your payslip takes the employee hit, while your client (or agency) shoulders the employer NIC. If you’re outside, you manage your own NICs via Self Assessment, usually through Class 2 and Class 4.
A Case From Practice: The Surprised Consultant
Take James, a consultant in Manchester, who worked with a fintech startup. Pre-April 2025, the business fell under the “medium” umbrella, so it issued him an SDS saying he was outside IR35. Come April, with turnover under £15m and fewer than 50 staff, the company now counted as “small”. Suddenly, the responsibility shifted back to James.
He hadn’t reviewed his contracts in years. HMRC later argued that his day-rate contract looked and behaved more like an employment relationship (set hours, no substitution allowed). James ended up with an unexpected tax bill — and a few sleepless nights.
This isn’t unusual. In my experience, many contractors assume “once outside, always outside”. The rules don’t work like that. Each engagement needs reviewing afresh, especially after April 2025.
What You Should Do First
If you’re taking on or managing a project, here’s your immediate checklist:
Ask if your client is small, medium, or large under the new thresholds.
Confirm who has to decide your status — you or them.
Review the contract terms for IR35 red flags: control, substitution, mutuality of obligation.
Check your actual working practices match what’s written in the contract.
Run HMRC’s CEST tool to support your records (CEST tool).
Keep documentation — contracts, emails, work logs. If HMRC ever questions you, paper trails save headaches.
IR35 UK Impact Analysis
Step-by-Step: Verifying IR35 Status and Your Tax Position
Why Status Checks Can’t Be Left to Guesswork
Now, let’s think about your situation. You’ve landed a contract, you’re keen to get cracking, but you’re unsure whether HMRC would see you as a genuine contractor or effectively an employee. This isn’t something you can “hope for the best” with — a wrong call can leave you footing an unexpected bill for back-tax and interest.
HMRC has made it clear: each engagement needs to be reviewed on its own terms. That means contracts, working practices, and payment structures all need to be scrutinised.
You can see their official guidance here: Employment status for tax.
Step 1: Gather Your Key Documents
Before even touching tools or checklists, gather the essentials:
● Your written contract with the client or agency.
● Any emails or agreements showing how work is done in practice.
● Your payslips or invoices from the engagement.
In practice, I’ve often found mismatches: the contract says “freedom to substitute” but the client emails show they wanted only you. If HMRC checks, it’s the working reality that counts.
Step 2: Use HMRC’s CEST Tool
HMRC provides the Check Employment Status for Tax (CEST) tool.
It asks you questions about:
● Control: Who decides how, when, and where the work is done?
● Substitution: Can you send someone else to do the job?
● Mutuality of Obligation (MOO): Is the client obliged to offer work, and are you obliged to accept?
● Financial risk: Do you provide equipment or correct mistakes at your own cost?
● Integration: Do you look and feel like part of the client’s organisation?
The output gives you a determination. If you answer honestly and keep a copy of the result, it forms part of your defence if HMRC ever challenges your position.
Step 3: Cross-Check the Core Factors
CEST is a useful tool, but it doesn’t always capture nuance. From my years working with contractors, I recommend creating a simple worksheet with these seven headings:
Control – How much independence do you have in how the work is done?
Substitution – Could you send someone else? Has this ever been tested in practice?
Mutuality of Obligation – Are you tied into a steady stream of work, or can both sides walk away freely?
Financial Risk – Do you stand to lose money if the job overruns or errors occur?
Equipment – Are you bringing your own laptop, tools, or software licences, or are you using the client’s?
Payment Structure – Is it a fixed fee for a project, or are you paid hourly like staff?
Multiple Clients – Do you juggle several clients, or are you effectively tied to one?
When I’ve walked clients through this, writing it down often highlights issues they hadn’t spotted — for example, a so-called “substitution clause” that was only theoretical, with the client insisting only they personally could do the work.
Step 4: Work Out the Tax Difference
If you’re inside IR35, the fee-payer (agency or client) must treat you like an employee for tax. That means:
● PAYE Income Tax is deducted at source.
● Employee National Insurance is deducted at source.
● Employer NIC is paid separately by the engager.
See the official breakdown: How off-payroll working rules affect contractors.
If you’re outside IR35, you invoice through your limited company, declare profits, and pay:
● Corporation Tax (25% in 2025/26 if profits exceed £250,000, tapered if lower).
● Income Tax via dividends.
● Class 2 and Class 4 National Insurance through Self Assessment.
See: Corporation Tax rates and National Insurance for the self-employed.
Worked Example: Comparing Inside vs Outside
Imagine Sarah, a project manager in Cardiff, earns £80,000 a year on contracts.
● Inside IR35: Her client deducts PAYE and NIC. She takes home roughly £51,000 after Income Tax and employee NIC.
● Outside IR35: She pays Corporation Tax, then draws dividends, paying Income Tax at dividend rates. Her take-home might be nearer £58,000, depending on expenses and allowances.
That £7,000 difference is why status matters so much.
Step 5: Don’t Forget Regional Variations
Tax isn’t uniform across the UK. For instance:
● Scottish taxpayers face six bands, with a 48% top rate from April 2025.
● Welsh taxpayers currently mirror England/Northern Ireland but have devolved powers.
If you live in Scotland but contract for a London client, it’s your residency that sets your tax bands, not where the client is. This is a common mistake I’ve seen with contractors working remotely across borders.
Step 6: Watch for Complications
Some situations add extra wrinkles:
● Emergency tax codes can apply if you change contracts quickly and HMRC hasn’t updated your records. Always check your payslip against your tax code.
● If your income exceeds £50,000 and you or your partner receive Child Benefit, you may owe the High Income Child Benefit Charge.
● Running multiple contracts? Be sure to declare all income through Self Assessment: Self Assessment tax returns.
Over the years, I’ve seen people tripped up when they thought an agency “sorted it all out” — but side hustles, rental income, or dividends pushed them into higher bands.
Step 7: Keep Records Ready
HMRC may ask questions years after the fact. Protect yourself by keeping:
● Copies of contracts.
● CEST tool results.
● Correspondence proving independence.
● Detailed expense receipts.
The official record-keeping guidance is here: Keeping records for tax.
Managing IR35 for Businesses and Branch Situations
Why Businesses Need to Take IR35 Seriously
Be careful here, because I’ve seen companies trip up badly when they assume “IR35 only affects the contractor”. In reality, if you’re the engager — whether as an agency, medium-sized company, or even a public body — HMRC can hold you liable for unpaid tax and NIC if determinations are mishandled.
The rules apply differently depending on your size. Since April 2025, if you’re a small business under the Companies Act thresholds, the contractor decides their own status. If you’re medium or large, the responsibility falls on you to issue a clear Status Determination Statement (SDS).
What an SDS Must Contain
An SDS is not just a tick-box form. HMRC requires that it:
● States whether the contractor is inside or outside IR35.
● Explains the reasoning behind the decision.
● Is passed to the contractor and the party paying them (if an agency is involved).
If you fail to take “reasonable care” in preparing an SDS, HMRC can transfer liability back to you. This is more than paperwork — it’s about demonstrating a fair and consistent process.
How Businesses Can Show Reasonable Care
From years of reviewing clients’ approaches, the businesses that stay safest tend to follow three habits:
Structured assessment: Use the CEST tool for each engagement, but add internal notes showing you considered working practices too.
Regular reviews: Don’t rely on a status decision from years ago. If a contractor’s role changes, so could their IR35 status.
Training: Make sure HR and project managers understand what factors matter. Many disputes I’ve seen arise from someone casually stating, “Oh yes, she’s just like an employee here”.
HMRC’s guidance: Off-payroll working rules responsibilities.
The 45-Day Rule for Disputes
Contractors can disagree with your SDS. If they raise a dispute, you have 45 days to respond with either:
● A new SDS reflecting a revised decision, or
● Confirmation that your original stands, with reasons.
If you miss this window, the liability for tax and NIC reverts to you.
Official guidance: Disagreeing with an employment status determination.
Managing IR35 in Project Environments
In project-heavy industries like IT, construction, or finance, IR35 management should be treated as a strand of project risk management:
● At onboarding: Run a status check before the contractor starts.
● During delivery: Monitor working practices. If they begin attending daily stand-ups like staff, the risk rises.
● At renewal: Treat contract extensions as a fresh assessment point.
In practice, I’ve seen construction firms particularly vulnerable here. A project may start with a genuine “outside” contractor role, but six months in, the contractor becomes embedded in site management. Without reassessment, that’s a potential HMRC problem waiting to happen.
Umbrella Companies and Edge Cases
Some contractors now choose umbrella companies to bypass IR35 headaches. If so, the umbrella company is the employer, and it deducts PAYE/NIC. But businesses must still check the umbrella is compliant — HMRC has targeted non-compliant umbrellas before.
See: Employment intermediaries and IR35.
Other edge cases include:
● Emergency tax codes when contractors switch mid-year. Always advise them to check their tax code.
● Multiple engagements: A contractor may be inside IR35 with you but outside with another client. That doesn’t affect your liability — you only need to manage your side correctly.
Record-Keeping for Businesses
To show reasonable care, businesses should keep:
● Copies of all SDS decisions.
● Evidence of using the CEST tool.
● Records of any disputes and responses within 45 days.
● Notes of internal discussions.
Guidance: Keeping records for PAYE.
Professional Anecdote: The Tech Firm’s Costly Oversight
One medium-sized tech client I advised in London assumed contractors were “low risk” and didn’t bother issuing SDSs consistently. After an HMRC review, they were hit with a bill for unpaid NIC — over £200,000 across several contracts. What really hurt wasn’t just the money, but the reputational damage when HMRC published enforcement action in sector newsletters.
The lesson? Even where the financial risk feels manageable, reputational risk can hit harder.
What Contractors Should Expect from Clients
If you’re the contractor, don’t sit back passively. Reasonable clients should:
● Provide an SDS where required.
● Explain the reasoning clearly.
● Respond within 45 days if you disagree.
If that isn’t happening, it’s a red flag. Keep your own records in case HMRC ever questions you directly.
The Business Owner’s Checklist
Here’s a practical checklist if you’re running a company engaging contractors:
● Confirm your company size classification under the Companies Act thresholds.
● For each contractor, decide whether you or they are responsible for status.
● If it’s you, issue an SDS before work begins.
● Use CEST and record the outcome.
● Document actual working practices during the contract.
● Reassess at contract renewal or role changes.
● Handle any disputes within 45 days.
● Keep all records securely for HMRC review.
Summary of Key Points
IR35 rules define whether a contractor is taxed as an employee or self-employed, with big differences in take-home pay.
From April 2025, contractors take back responsibility for IR35 decisions when clients are “small businesses”, under updated £15m/£7.5m thresholds.
Medium and large clients must issue an SDS, and can be liable for errors if they don’t show reasonable care.
Each contract is judged separately — working practices matter more than contract wording.
Inside IR35 means PAYE and employee NIC deducted at source; outside means managing tax via Self Assessment and dividends.
Regional differences apply — Scotland has six tax bands with a 48% top rate in 2025/26.
Businesses must respond to SDS disputes within 45 days, or the liability shifts back to them.
Umbrella companies may simplify compliance, but businesses should ensure the umbrella is legitimate and compliant.
Record-keeping is crucial — contracts, CEST results, and dispute logs protect both contractors and clients.
Poor IR35 management carries reputational as well as financial risks, so proactive handling is essential for peace of mind.
FAQs
Q1: Can someone working through payroll still face IR35-like scrutiny if they handle project deliverables unusually?
A1: Well, it's worth noting that even PAYE workers can attract scrutiny if their work pattern mirrors a contractor’s—say, delivering defined project milestones with autonomy. HMRC may probe whether you're being treated more like a contractor in disguise, so clients should document your payroll status clearly. I've seen finance teams in Bristol get caught out when a “PAYE project-based temp” had separate milestone payments—so clear records matter.
Q2: Could someone’s tax code be misleading evidence of IR35 status in an audit?
A2: In my experience with clients, a tax code—especially if emergency or default—can mislead you into thinking you’re outside IR35 when you're not. Always check your entire remuneration structure, not just the code. For instance, one Leeds consultant thought their 1257L code meant they were fine—yet their contract, control, and substitution rights said otherwise.
Q3: What happens if someone has underpaid tax because IR35 applied to side gigs they forgot to flag?
A3: It’s a common mix-up, but here’s the fix: HMRC may consider each contract separately, and missing IR35 disclosures on side work can trigger under-payment. I’ve helped an IT trainer in Manchester who had three small contracts on weekends—forgetting IR35 logic there led to a surprise PAYE adjustment. Best practice? Treat every side gig as potentially “inside IR35”, log it, and issue proper invoices and assessments.
Q4: Is there a quick-and-dirty mental checklist to sense whether a contract might be inside IR35 when you’re only wearing your mobile and laptop?
A4: In casual terms, yes—ask yourself: "Am I bossing my own time, sending a stand-in if needed, juggling clients?" If the answer is “no” to three of those, you’re probably inside IR35. I once told that to a contractor in Sheffield who immediately realised their “flexible” engagement was actually rigid, and we were able to tweak the wording and working style.
Q5: Can PAYE workers claim back overpaid tax when IR35 confusion caused excess deductions?
A5: In practical terms, absolutely—if PAYE payroll deductions have been more than necessary due to misinterpreting IR35 status. One client in Cardiff got an unexpected refund simply because their payroll team misclassified a project deliverable as contractual income. It’s always worth checking your payslips against your contract.
Q6: Could a wrong IR35 status determination affect pension contributions automatically?
A6: It often does. A mistaken “inside IR35” view can cause a drop in your pension contributions if your employer treats you like a regular salary earner without topping up the employer part. I had a contractor in Edinburgh who realised his pension pot had frozen because the client treated him as outside—it was reversed once we clarified paperwork.
Q7: What if someone genuinely can’t substitute themselves—does that always put them inside IR35?
A7: Not necessarily. In my practice, I’ve seen rules relaxed if you can show that, practically, substitution isn’t sensible (say, due to specialist knowledge), but the right is still there contractually. A project manager in London made his cribbed clause swap-in-versus-me business-like, and that helped nudge him outside IR35 despite specificity.
Q8: Is HMRC slower to respond when multiple contracts raise multiple status questions?
A8: Sadly, yes—I've seen delays of months when someone’s portfolio spans five or six clients, each with differing terms. My tip? Keep thorough records of every decision, correspondence, and SDS. It surprises clients how simply layering documentation helps when HMRC takes longer to reply.
Q9: Can someone working simultaneously on public-sector and private-sector projects face dual IR35 assessments?
A9: Very much so. You might be inside IR35 for a public-sector gig (client assesses), and for a small private client, you assess yourself. I had a client juggling NHS work and a startup contract—managing both transparently helped avoid confusion and double deductions.
Q10: How could a self-employed project manager demonstrate genuine business risk to strengthen outside-IR35 standing?
A10: In my view, you need some visible skin in the game—like covering your own errors, holding insurance, or investing in training or tools. A contractor in Bristol once bought a specialist PM software license himself; that small move added real weight to the argument that he was genuinely in business on his own account.
Q11: Should a contractor working through a small agency rely on the client’s small-company status?
A11: It’s common to assume that if your end client is small, you're off the hook—but if that client’s parent is medium or large, IR35 rules still apply and they must assess. I guided a London consultant through that nuance—he was told no status required, but digging revealed the parent company was large, so they had to issue an SDS.
Q12: What’s the one documentation trick clients often forget that can save contractors in an HMRC investigation?
A12: It's often just a contemporaneous note: a quick email stating “We confirm you control sequence of work, substitution permitted, no mutuality.” That alone, in my audits, has saved people from tricky investigations because it evidences real intent beyond the signed contract.
Q13: How can a contractor challenge a status determination without escalating to tribunal?
A13: There’s a gentle fix: request the client to explain their reasoning formally and ask for a second look. I’ve helped contractors phrase a friendly request (“Could you revisit the SDS reasoning around control and substitution?”), and often clients adjust without friction—keeping relationships calm and compliant.
Q14: Can someone deduct business expenses like travel if they're inside IR35?
A14: Sadly, not in the usual way—inside IR35 means most travel, subsistence, or overnight stays can't be claimed unless exceptional. I had a consultant whose four-night-a-week travel meant he lost nearly a fifth of his net—sometimes it just doesn’t stack, so pricing must reflect that.
Q15: Could hybrid remote/in-office patterns post-pandemic change an IR35 outcome mid-contract?
A15: Definitely. Working patterns affect status—if you shift from remote work to being integrated in team hubs, that can tip the balance. I advised a project lead in Leeds who moved from home to client’s HQ: we revised the contract mid-term to reinforce independence to preserve outside status.
Q16: If someone’s already paid inside-IR35 rates but later evidence shows they’re outside, can they reclaim NI?
A16: In theory, yes—if you can reliably evidence that you're outside, you can ask the fee-payer to reclaim employer NI. Most will, rather than face HMRC involvement. That said, it’s rare, but I’ve seen it done when someone’s contract and working patterns clearly showed independence.
Q17: What’s a practical way for high-earners to justify multi-client setups to stay outside IR35?
A17: Show business diversification—like marketing, proposals, and active onboarding of two or three other clients. I remember a top-tier PM who shared his pipeline stats with clients to demonstrate business-at-risk. It helped him stay outside IR35 even with a long-term project.
Q18: Might someone’s pension-auto-enrolment obligations (for employers) signal IR35 inside?
A18: It can outwardly suggest an employment relationship—but if you’re using your own company and not enrolled by the client, that nuance helps. I once corrected a client who had auto-enrolled a contractor, thinking it avoided a problem—but it risked IR35 signalling, so we withdrew it cleanly.
Q19: What happens if a contractor doesn’t respond to a client’s status request within 45 days under new rules?
A19: As of 2025, contractors can request client size confirmation, and clients must respond within 45 days. If they don’t, it muddies determination and responsibility. I’ve had contractors nudge clients formally after day 30—often gets answered promptly and clarifies who assesses status.
About the Author:
Adil Akhtar, ACMA, CGMA, serves as CEO and Chief Accountant at Pro Tax Accountant, bringing over 18 years of expertise in tackling intricate tax issues. As a respected tax blog writer, Adil has spent more than three years delivering clear, practical advice to UK taxpayers. He also leads Advantax Accountants, combining technical expertise with a passion for simplifying complex financial concepts, establishing himself as a trusted voice in tax education.
Email: adilacma@icloud.com
Disclaimer:
The content provided in our articles is for general informational purposes only and should not be considered professional advice. Pro Tax Accountant strives to ensure the accuracy and timeliness of the information but makes no guarantees, express or implied, regarding its completeness, reliability, suitability, or availability. Any reliance on this information is at your own risk. Note that some data presented in charts or graphs may not be 100% accurate.
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