If you work through your own limited company, IR35 decides whether HMRC sees you as genuinely self-employed or an employee in disguise. Here's where the rules stand in 2026.
IR35 — formally the off-payroll working rules — is one of the most misunderstood areas of tax for contractors. At its heart it asks a simple question: if you stripped away your limited company, would the relationship between you and your client look like employment? If the answer is yes, IR35 applies and the engagement should be taxed broadly like employment.
Why IR35 exists
Many contractors work through a personal service company (PSC). Done properly this is entirely legitimate. But HMRC introduced IR35 to stop "disguised employment" — where someone does the same job as an employee, with the same control and security, but routes their income through a company to pay less tax.
Who decides your status in 2026?
This is the part that trips people up, because responsibility depends on the size of your client:
- Public sector, and medium or large private-sector clients: the client (or the agency paying you) decides your IR35 status and operates any tax due.
- Small private-sector clients: the responsibility stays with you, the contractor, through your own intermediary. You decide whether IR35 applies and account for the tax if it does.
So if your clients are small businesses, the burden of getting IR35 right sits squarely with you.
What counts as a "small" client?
A private company is "small" if it meets at least two of three conditions. From 6 April 2025 these thresholds were raised:
| Test | Small-company threshold |
|---|---|
| Annual turnover | Not more than £15 million (was £10.2m) |
| Balance sheet total | Not more than £7.5 million (was £5.1m) |
| Employees | Not more than 50 (unchanged) |
Worth knowing: because company size is judged on past accounts, HMRC has confirmed the higher thresholds will not change any client's off-payroll position until 6 April 2027 at the earliest. Until then, the previous limits effectively still apply.
The status tests that decide it
Whether IR35 applies turns on the same principles HMRC and the courts use for employment status:
- Control: how much say the client has over how, when and where you work. The more they direct you, the more it looks like employment.
- Substitution: could you send a qualified replacement to do the work? A genuine right of substitution points away from employment.
- Mutuality of obligation: is the client obliged to offer work, and are you obliged to accept it? Ongoing obligation looks employment-like.
Other factors — financial risk, whether you provide your own equipment, and how integrated you are into the client's organisation — all feed into the overall picture.
Inside or outside IR35 — what it means for your pay
If a contract is outside IR35, you can pay yourself in the usual tax-efficient mix of salary and dividends. If it is inside IR35, the income is broadly taxed like employment income, with PAYE and National Insurance applied — which typically reduces take-home pay materially.
Staying on the right side of the rules
- Review each contract and the actual working practices — HMRC looks at the reality, not just the wording.
- Keep evidence: contracts, a genuine right of substitution, your own equipment, and multiple clients.
- Use HMRC's CEST tool as a starting point, but treat it as a guide, not gospel.
- Get an independent IR35 status review for higher-value or long-running contracts.
We help contractors and small limited companies across Erith and Kent structure their affairs correctly, review contracts for IR35 risk, and run a compliant salary-and-dividend setup. If you are unsure where a contract stands, book a free consultation before you sign.
Need a hand with this? BDH Accounting offers fixed-fee, ACCA-accredited support to sole traders and small businesses across Erith, Bexley, Dartford and Kent. Book a free consultation.
This article is general guidance based on the rules at the time of writing (18 May 2026) and is not personal tax advice. Tax rules change and individual circumstances differ — please get advice before acting.