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Ross Gylanders
June 18, 2026
IR35 is the common term used for the UK’s off-payroll working rules, introduced by HM Revenue and Customs (HMRC) in 2000. The primary purpose of this legislation was to tackle ‘disguised employment’.
In the contracting sector, many individuals operate through an intermediary, most commonly their own Limited Company (also known as a Personal Service Company, or PSC). IR35 determines whether a contractor is genuinely operating as a self-employed business providing services to a client, or if the working relationship is more similar to permanent employment.
If an assignment resembles employment, HMRC requires the relevant taxes and National Insurance contributions (NICs) to be paid in line with PAYE rules.
Determining your IR35 status dictates how a contractor is paid and how their income is taxed.
When an assignment is classified as outside IR35, the contractor is deemed to be operating as a genuine independent business.
Payment Terms: The limited company invoices the recruitment agency or end client and receives gross payment without deductions for tax or National Insurance.
Tax Responsibilities: The limited company holds full responsibility for managing its own tax affairs. The contractor can withdraw income through a combination of salary and dividends, subject to current tax legislation.
Business Autonomy: The contractor retains high levels of professional independence, maintains control over how, when, and where the work is completed, handles their own financial risks, and can simultaneously support multiple clients.
When an assignment falls inside IR35, it means that if the intermediary (the PSC) were removed, the relationship between the contractor and the end client would be one of employment.
Tax Treatment: The contractor is viewed as an employee for tax purposes.
Deductions: All earnings from the assignment must be processed with employment taxes (Income Tax and employee NICs) deducted at source.
Working Conditions: The contractor generally works under conditions with low autonomy, limited rights of substitution, significant client control, and minimal commercial financial risk.
ADVANCE offer a suite of market-leading solutions for contractors across all sectors. If you’re unable to work through a PSC/Limited Company, don’t worry, we can help you find the best solution.
We are offering technical and tailored advice, workshops, client visits & support to ensure you and your clients understand the impact of the legislation changes that happened in April 2021. Working with ADVANCE puts you in safe hands with our range of services and market-leading solutions.
ADVANCE’s IR35 status tool provides you and your clients with software that is educational and provides status determinations, with a score for each section.
If an end-client issues an SDS declaring a role inside IR35, contractors can no longer receive gross payments into their limited company without risking substantial HMRC penalties. Instead, agencies and contractors must utilise fully compliant PAYE solutions.
ADVANCE acts as a fully compliant intermediary employer sitting between the worker, the recruitment agency, and the end client.
How it Works: The agency pays an agreed contracting rate (known as company income) to the umbrella provider. The umbrella retains its fixed margin and deducts all employment costs including: Employer’s National Insurance, the Apprenticeship Levy, holiday pay provisions, and employer pension contributions.
Tax Treatment: The remaining balance forms the worker’s gross pay, which is processed entirely through PAYE with income tax and employee National Insurance deducted at source. Contractors get full statutory employment rights, such as; workplace pensions, statutory sick pay, and statutory leave.
A PEO is an alternative PAYE employment model that simplifies payroll presentation for the worker.
How it Works: Instead of a complex contracting assignment rate, the worker is given a clear, transparent PAYE wage rate from the start.
Presentation: All statutory employer costs and margins are invoiced separately and charged directly back to the recruitment agency. The employee’s payslip is simplified, showing only gross PAYE pay, standard employee tax/NIC deductions, and net pay.
New off-payroll working rules were introduced in the public sector, which transferred the responsibility to account for PAYE/NIC from the individual to the engager (or fee payer if someone else paid the contractor). The public sector rules were extended to large and medium-sized businesses in the private sector from April 2021.
IR35 in simple terms means that if a worker is a disguised employee, he/she should be subject to the same tax and national insurance deductions as other regular employees.
The off-payroll working rules (more commonly known as IR35) was introduced.
New off-payroll working rules were introduced in the public sector which transferred the responsibility to account for PAYE/NIC from the individual to the engager (or fee payer if someone else paid the contractor).
The public sector rules were extended to large and medium sized businesses in the private sector.
Got questions? We are here to help.
Here are a few of our most frequently asked questions about working inside or outside IR35.
An inside IR35 determination means a contractor is classed as an employee for tax purposes. Income Tax and Employee’s National Insurance contributions (NICs) must be deducted at source via PAYE before paying the contractor. An outside IR35 determination means the contractor is operating as a legitimate, independent business. They can be paid gross against an invoice and are responsible for managing their own corporate and personal taxes.
For public sector organisations and medium-to-large private sector end-clients, the responsibility sits entirely with the end-client to assess the working relationship and issue a Status Determination Statement (SDS). However, if the end-client qualifies as a “small company” under HMRC criteria, the off-payroll working exemptions apply, and the legal responsibility to self-assess tax status reverts to the contractor’s Personal Service Company (PSC).
HMRC assesses employment status based on case law and three core pillars:
If an end-client fails to exercise “reasonable care” or an agency processes a worker gross for an engagement that HMRC later deems to be inside IR35, the financial liabilities can be severe. As the fee-payer, the recruitment agency faces direct liability for backdated PAYE tax, employee and employer National Insurance contributions, Apprenticeship Levies, and substantial non-compliance penalties plus interest.
