IR35 Rules (2026): Off-Payroll Working, April Changes & Guide

IR35, officially known as the off-payroll working rules, is UK tax legislation introduced in 2000 (named after Inland Revenue press release IR35) to prevent tax avoidance through ‘disguised employment.’ This occurs when individuals work through limited companies or Personal Service Companies (PSCs) while performing duties that are essentially the same as those of a permanent employee.

Without IR35, a contractor operating through a PSC could pay themselves a small salary and take the remainder as dividends, significantly reducing their Income Tax and National Insurance contributions compared to an equivalent employee. IR35 closes this gap by requiring that where the working relationship is effectively one of employment, the contractor pays broadly the same tax as an employee would.

The legislation applies to contractors who provide services to a client through an intermediary (typically a PSC or limited company) and whose working relationship with the client would be one of employment if the intermediary were not in place.

Responsibility for determining whether IR35 applies depends on the size of the end client:

Medium and Large Clients

Since April 2021, medium and large private sector businesses (and all public sector bodies) must determine the employment status of contractors who work through intermediaries. If the determination is ‘inside IR35,’ the client must issue a Status Determination Statement (SDS) to the contractor and the fee-payer (typically a recruitment agency). The fee-payer then deducts Income Tax and employee National Insurance at source, similar to an employee.

Small Clients

If the end client is a small company (meeting at least 2 of 3 criteria: turnover ≤£10.2 million, balance sheet ≤£5.1 million, ≤50 employees), the off-payroll working rules do not apply. Instead, the contractor’s PSC remains responsible for determining IR35 status and accounting for tax. This is known as the Chapter 8 (old IR35) regime.

HMRC and the courts use three primary tests to determine whether a contractor is genuinely self-employed or is in a relationship of ‘disguised employment’:

1. Control

Does the client control what the contractor does, how they do it, when they do it, and where they do it? The more control the client exercises, the more the relationship resembles employment. Genuine self-employment typically involves the contractor determining their own working methods, hours, and location.

2. Substitution

Does the contractor have a genuine right to send a substitute to perform the work in their place? If the client requires the contractor to perform the work personally, this points toward employment. A genuine right of substitution (where the contractor can send a qualified replacement at their own cost) is a strong indicator of self-employment.

3. Mutuality of Obligation (MOO)

Is the client obliged to offer work, and is the contractor obliged to accept it? In an employment relationship, the employer must provide work and the employee must perform it. In genuine self-employment, the contractor can decline engagements and the client has no obligation to offer further work. HMRC’s CEST tool does not assess MOO (HMRC assumes it exists where there is a contract), which is one reason many professionals consider the tool inadequate.

No single test is decisive. HMRC considers the totality of the relationship, and the reality of how work is performed matters more than what the contract states.

HMRC’s Check Employment Status for Tax (CEST) tool is the official online tool for assessing IR35 status. It is free to use and HMRC states it will stand by the result provided the information entered is accurate. However, the tool has well-documented limitations:

• CEST does not assess mutuality of obligation, which courts have recognised as a relevant factor
• The tool can return ‘unable to determine’ in complex cases, leaving the user without guidance
• CEST relies on the user’s answers, not independent evidence, meaning biased or inaccurate input produces unreliable results
• Many professional advisors recommend obtaining an independent IR35 status review in addition to or instead of relying solely on CEST

For international companies engaging UK contractors, CEST is a starting point but should not be treated as definitive for complex or high-value engagements.

Two significant changes take effect from April 2026 that affect how contractors are engaged in the UK:

1. New Company Size Thresholds

From 6 April 2026, the thresholds for small company classification under the Companies Act increase:

A company meeting at least 2 of these 3 criteria is classified as small. Approximately 14,000 companies currently classified as medium will become small, meaning they are no longer responsible for making IR35 status determinations. The contractor’s PSC takes on that responsibility instead.

Important: under the Companies Act, a company must meet the small-company criteria for two consecutive financial years before its classification changes. Because IR35 assessments use the previous year’s accounts, the practical impact for many businesses will not be felt until contracts are renewed or new engagements begin after 5 April 2026.

2. Joint and Several Liability (JSL) for Umbrella Companies

From April 2026, the government introduces Joint and Several Liability (JSL) rules targeting umbrella company supply chains. If an umbrella company fails to pay the correct PAYE or NIC to HMRC, liability can be transferred first to the recruitment agency and then to the end client.

Key points about JSL:

• There is no ‘safe harbour’: even rigorous due diligence on the umbrella company does not protect agencies or clients from inheriting liability if the umbrella fails to pay
• This significantly increases the financial risk of using umbrella companies, particularly non-compliant or opaque ones
• Many industry observers expect JSL to drive renewed interest in outside-IR35 PSC engagements and Statement of Work (SoW) delivery models, where the umbrella is removed from the chain entirely

For international companies, the practical impact is significant. Engaging a contractor inside IR35 costs the client more (because employer NIC is payable on top of the contractor’s fee) and delivers less to the contractor (because Income Tax and employee NIC are deducted at source). Many contractors refuse inside-IR35 engagements or demand significantly higher day rates to compensate for the tax burden.

The consequences of incorrect IR35 determinations can be severe:

• Backdated tax and NIC: HMRC can retrospectively investigate IR35 status and demand unpaid Income Tax and National Insurance for the full period of the engagement, potentially covering several years.
• Interest: Interest is charged on all unpaid tax from the date it was originally due.
• Penalties: HMRC can impose penalties of up to 100% of the tax owed in cases of deliberate non-compliance. Even careless errors attract penalties of 0–30%.
• Liability transfer: If the client failed to take reasonable care in making the status determination, HMRC can transfer the tax liability to the client rather than the fee-payer. This is known as a ‘transfer of debt’ provision.
• Reputational risk: HMRC publishes details of tax avoidance schemes and has named organisations in connection with IR35 investigations. High-profile cases have affected major financial institutions and government departments.

HMRC has shifted more than 130,000 workers into deemed employment tax status since the 2021 private sector reforms, indicating the scale of enforcement activity.

For companies based outside the UK that engage contractors in the UK, IR35 applies regardless of where the client is headquartered. If the contractor performs work in or for a UK-based engagement, the off-payroll working rules apply.

Key considerations for international employers:

• You may be the ‘client’ for IR35 purposes even if you have no UK legal entity. If you engage a UK-based contractor through a PSC, you need to determine whether you are a small or medium/large organisation under the Companies Act thresholds.
• Using an EOR does not automatically avoid IR35: If you hire someone through an Employer of Record, they are an employee of the EOR, and IR35 does not apply because there is no PSC intermediary. However, if you engage a UK contractor through their own limited company (not via an EOR), IR35 must be assessed.
• Contractor misclassification risk: International companies often engage UK workers as ‘contractors’ when the working relationship is effectively one of employment. This creates dual risk: IR35 tax liability if the contractor works through a PSC, and employment status risk (holiday pay, sick pay, unfair dismissal rights) if the contractor is later reclassified as a worker or employee.
• The safest approach for most international companies is to hire UK-based workers through an EOR as employees, removing IR35 risk entirely. If genuine contractor engagement is appropriate, obtain a professional IR35 status review before proceeding.

IR35 remains one of the most significant compliance risks for any company engaging contractors in the UK. The core legislation has not changed, but the April 2026 developments new company size thresholds reclassifying approximately 14,000 businesses as small, mandatory payrolling of benefits in kind, and the Joint and Several Liability rules for umbrella company supply chains, are reshaping the practical landscape for how contractors are engaged.

For medium and large clients, the obligation to assess IR35 status and issue Status Determination Statements remains unchanged. For newly-small clients, the responsibility shifts back to the contractor’s PSC from the first contract renewal or new engagement after 5 April 2026. For all parties using umbrella companies, the JSL rules introduce a new layer of financial exposure that cannot be mitigated through due diligence alone.

International companies hiring in the UK face a choice: navigate IR35 compliance directly (which requires UK tax expertise, professional status reviews, and ongoing monitoring) or hire through an Employer of Record as employees, removing the PSC intermediary and IR35 risk entirely. For most international companies, particularly those without a UK entity or in-house UK tax capability, the EOR route is the lower-risk option.

For EOR provider comparisons in the UK, see our Best Employer of Record in the UK guide.