How to Handle IR35 and Its Tax Implications
- MAZ
- 2 days ago
- 23 min read
Index:
IR35 Demystified – What It Is and Why It Matters for UK Contractors and Employers in 2025
Determining IR35 Status in Practice – How to Use CEST, Spot Red Flags, and Avoid Common Traps
The Financial Impact of IR35 – Take-Home Pay, Emergency Tax, and How to Maximise What You Keep
IR35 for Employers – Responsibilities, Risk Mitigation, and Compliance
The Audio Summary of the Key Points of the Article:
IR35 Demystified – What It Is and Why It Matters for UK Contractors and Employers in 2025
If you're wondering how to handle IR35 and its tax implications in the UK, here's the straight answer: IR35 (also known as the off-payroll working rules) determines whether a contractor should be treated as an employee for tax purposes. If IR35 applies, it can significantly impact your take-home pay and compliance obligations—both for contractors and the businesses that hire them.
Whether you're a seasoned freelancer working through a limited company or a business engaging independent specialists, understanding IR35 in 2025 isn’t optional—it’s essential. This first part breaks down what IR35 actually is, how it’s applied post-2021 reforms, and why it’s more than just a tax rule—it's a game changer for the UK’s flexible workforce.
What Is IR35 and Why Does It Exist?
The Purpose Behind the Rule
Introduced in 2000, IR35 exists to prevent “disguised employment,” where workers operate through intermediaries (typically a personal service company, or PSC) but work like regular employees—just without paying the associated Income Tax and National Insurance Contributions (NICs).
HMRC's mission? To ensure that workers pay broadly the same tax and NICs whether they’re on payroll or not, if the nature of their engagement is essentially that of an employee.
The Intermediary Triangle
IR35 affects three main parties:
The Contractor (Worker) – provides services via their intermediary (usually a limited company).
The Client (Engager) – receives the service.
The Fee-Payer – the entity paying the contractor (can be the client or an agency).
Key Concepts:
Term | Meaning |
PSC (Personal Service Company) | A limited company through which a contractor operates |
Inside IR35 | Contractor is considered an employee for tax purposes |
Outside IR35 | Contractor is genuinely self-employed |
SDS (Status Determination Statement) | A required document stating whether IR35 applies and why |
Deemed Employer | The entity responsible for applying PAYE if IR35 applies |
Key Concepts of IR35 and PSCs
Who Does IR35 Apply to in 2025?
Contractors
You're affected if:
You work through your own limited company or intermediary.
You provide services to clients in the UK (public or private sector).
The nature of your contract mirrors employment.
Businesses
You’re affected if:
You engage contractors via PSCs.
You’re not classified as a small company.
According to HMRC, a company is considered small if it meets at least two of these conditions:
Annual turnover: ≤ £10.2 million
Balance sheet total: ≤ £5.1 million
Number of employees: ≤ 50
Only small private-sector clients are exempt from having to assess IR35 themselves—the responsibility then falls on the contractor’s company.
How Is IR35 Status Determined?
HMRC’s CEST Tool
The Check Employment Status for Tax (CEST) tool is HMRC’s official checker, found here: CEST – GOV.UK
Key questions the tool asks:
Does the contractor have control over how, when, and where they work?
Can the contractor send a substitute?
Is the contractor part and parcel of the organisation?
Who bears the financial risk?
While CEST can help, it’s not foolproof—tribunal cases have shown HMRC can and will challenge ambiguous statuses.
The Big Three IR35 Tests
Test | What It Asks | Why It Matters |
Control | Who dictates what, when, where and how work is done? | If the client has tight control, it leans toward employment |
Substitution | Can someone else do the work? | A genuine business sends substitutes; employees don't |
Mutuality of Obligation (MOO) | Is the client obliged to offer work, and must the worker accept? | Ongoing obligation resembles employment |
IR35 in the Real World: Case Example
Let’s meet Gareth Blakesley, a tech consultant from Luton.
In 2024, Gareth signed a 12-month contract with a fintech firm, working four days a week from their office, using their equipment, following their hours. The company didn’t allow substitutes.
When HMRC reviewed the contract, Gareth’s status was ruled inside IR35. As a result, his client became the deemed employer and deducted:
Income Tax at standard PAYE rates
Employee NICs
The firm also had to pay Employer NICs (13.8%) and Apprenticeship Levy (if applicable).
Gareth’s take-home pay dropped by nearly 25%, and he had no rights to holiday or sick pay. Ouch.
2025 UK Tax Bands and Allowances: Essential for IR35 Contractors
As of the 2024/25 tax year (valid through March 2025), these are the current bands:
Income Range | Tax Rate | Band Name |
Up to £12,570 | 0% | Personal Allowance |
£12,571 to £50,270 | 20% | Basic Rate |
£50,271 to £125,140 | 40% | Higher Rate |
Over £125,140 | 45% | Additional Rate |
⚠️ Note: Personal Allowance reduces by £1 for every £2 earned over £100,000—completely vanishes at £125,140.
National Insurance Contributions (NICs) for employees in 2025:
8% on earnings between £12,570 and £50,270
2% on earnings above that
For employers:
13.8% on earnings above £9,100/year
Contractors inside IR35 are hit by both employee NICs (deducted from pay) and employer NICs (cost to the engager), making their contracts less lucrative than “outside” contracts.
Why IR35 Is a Big Deal in 2025
In the current gig economy, more than 4.3 million self-employed people operate in the UK (source: ONS). A significant portion of them use limited companies to optimise tax—especially in tech, finance, healthcare, and construction.
With HMRC ramping up compliance checks, especially since April 2021’s reforms, businesses and contractors need to get IR35 right—or risk penalties.
Penalties for Getting It Wrong
Up to 100% of unpaid tax/NICs (plus interest)
Reputational damage for clients, especially in regulated industries
Legal costs if challenged in tax tribunals
Umbrella Companies and IR35: A Common Workaround?
Some contractors opt for umbrella companies to bypass IR35 complications. Here’s how it works:
The umbrella company employs the contractor.
It invoices the client, deducts tax and NICs, and pays a net salary.
It’s PAYE from the get-go—so IR35 doesn’t apply.
Pros:
Simpler admin
Immediate compliance
Cons:
Fewer expenses claimable
Lower take-home pay
Risk of dodgy umbrella schemes (beware!)
TL;DR – What You Need to Know Now
IR35 applies when a contractor looks and works like an employee.
In most cases, clients must determine IR35 status—not the contractor.
If inside IR35, PAYE and NICs kick in.
Contractors should always review contracts carefully—IR35 can’t be dodged by job title or invoice format alone.
Keep your eyes on control, substitution, and mutual obligation—they’re the heart of every IR35 case.
IR35 Impact & Trends: UK Contractor Market Analysis (2020-2024)
Determining IR35 Status in Practice – How to Use CEST, Spot Red Flags, and Avoid Common Traps
If you're a UK contractor or a business hiring freelancers, understanding how IR35 status is actually determined is just as important as knowing what it is. The good news? You don’t need a tax degree to get this right—just a smart approach to contracts, a sharp eye for detail, and the right tools.
This section is your go-to, hands-on guide to correctly assessing IR35 status in 2025, avoiding dangerous red flags, and ensuring your working arrangement won’t land you in hot water with HMRC.
Who Decides IR35 Status in 2025?
Let’s clear this up right away:
Client Type | Who Decides IR35 Status |
Public sector client (any size) | The client |
Private/voluntary sector – medium or large | The client |
Private/voluntary sector – small | The contractor’s intermediary (usually their PSC) |
🔗 Source: GOV.UK – IR35 Guidance
So, if you’re a contractor working with a medium or large company in 2025, you don’t get to determine your own status anymore. That’s in the client’s hands—and that’s why you should understand how they’ll assess you.
Meet CEST: HMRC’s Status Checker Tool
The Check Employment Status for Tax (CEST) tool is HMRC’s digital brainchild, meant to help clients and contractors figure out if a working relationship falls inside or outside IR35.
✅ You can access CEST here: https://www.gov.uk/guidance/check-employment-status-for-tax
What CEST Asks:
Does the contractor have the right of substitution?
Who controls where, when, and how the work is done?
Is the contractor part of the client’s internal structure?
Does the contractor use their own tools?
Is there a mutual obligation to offer/accept ongoing work?
If CEST cannot make a determination, the responsibility remains with the client—and that’s when extra caution is needed.
⚠️ Important: HMRC has confirmed it will stand by the CEST result only if the answers provided are accurate and complete.
The Big Three Status Tests Explained
1. Control
Ask yourself: Who’s calling the shots?
If the client dictates daily tasks, work hours, or methods, that’s a red flag for employment.
If the contractor sets their own hours, chooses how to deliver the work, and can refuse additional tasks, it leans toward self-employment.
2. Substitution
This one’s key.
If the contractor must do the work personally, and no substitute is allowed—even in theory—then it's likely inside IR35.
A valid substitution clause, where someone equally qualified can take over the work, strengthens the case for outside IR35.
3. Mutuality of Obligation (MOO)
Fancy term, simple idea.
If the client expects the contractor to keep accepting work and the contractor expects ongoing work to be offered, MOO exists—which hints at employment.
If the contract ends when the project ends, and there's no assumption of continued work, MOO is missing—favouring outside IR35.
Common IR35 Red Flags to Avoid
Contractual and behavioural signals matter equally. You can have the best-written contract in the world, but if your working reality doesn’t match it, HMRC will see straight through it.
🚩 Red Flags That Could Land You Inside IR35:
Contractor uses client-issued laptops, emails, or desks daily.
There’s a clause like: “The contractor shall work under the supervision of the client’s project manager.”
Contractor is listed on the company org chart.
Work is ongoing with no clear end deliverable.
Client expects the contractor to attend weekly internal meetings like an employee.
Contractor works exclusively for one client over a long period.
These signs may trigger HMRC scrutiny or even an IR35 investigation.
Case Study: Where It Went Wrong
Florence Penhaligon, a data analyst from Derby, took on a 2-year contract with a major retailer in 2023. She was paid via her PSC, but:
Worked on-site 5 days a week
Was listed as “Data Team Lead” in internal communications
Used the client’s laptop, reporting directly to a line manager
The contract said she was a “consultant,” but her behaviour mirrored employment.
In 2024, HMRC investigated and ruled her inside IR35. The client had not produced an SDS, and they were held liable for £41,000 in back taxes and penalties—including unpaid employer NICs.
Florence also saw her own company lose a tax refund she had claimed in 2023.
SDS: Status Determination Statement
If you’re working with a medium or large client, they must provide a written SDS that:
Declares your IR35 status
Explains the reasons behind the decision
If the client fails to do this, the tax liability shifts to them, not the contractor.
✅ Contractors can challenge SDS decisions, and clients must:
Review the disagreement
Respond within 45 days
Writing IR35-Proof Contracts: What to Include
🛡 Want to keep your working relationship outside IR35? These are must-have contract clauses (but remember—reality must match the paperwork):
Clause | Why It Matters |
Substitution | Shows you’re a business, not an employee |
Project-based scope | Removes expectations of ongoing work |
Limited control clause | Reinforces contractor independence |
No benefits clause | Makes it clear there’s no entitlement to sick pay, holiday, etc. |
Right to concurrent work | Contractor can take on multiple clients |
Make sure contracts are reviewed by IR35 experts or specialist solicitors—not just generated from templates.
IR35 Status Appeals and Reviews
Think you were wrongly assessed? Here’s what to do:
Request a review from the client—within 45 days, they must respond.
Keep written records of all SDS communications.
Use HMRC’s IR35 helpline (or your accountant) for support.
If tax has been deducted, you might be eligible for a refund via your tax return—but only if it’s proven the status was wrong.
2025-Proof Tips for IR35 Compliance
✅ For Contractors:
Keep IR35-friendly contracts and actual working practices aligned.
Get written SDSs and challenge decisions if needed.
Avoid “permie-like” work patterns (e.g., reporting to a manager daily).
Avoid relying on one long-term client.
✅ For Clients:
Use CEST properly—don’t fudge the answers.
Issue SDSs promptly and document your reasoning.
Ensure hiring managers understand what “disguised employment” looks like.
IR35 Trends in the UK: Tax, Contractors, and Compliance (2020-2025)
The Financial Impact of IR35 – Take-Home Pay, Emergency Tax, and How to Maximise What You Keep
Let’s face it—being classed inside IR35 can feel like a financial gut punch. Suddenly, your carefully optimised contractor income takes a hit from Income Tax, National Insurance, and in many cases, emergency tax too. This section cuts through the confusion to explain the real-world financial impact of IR35 on your take-home pay in 2025, how to spot overtaxing, and what to do if you’ve been hit by the dreaded “emergency tax code.”
And yes—we’ll also walk through how to legally keep more of what you earn.
How IR35 Hits Take-Home Pay in 2025
The Basic Difference
Status | Tax Treatment |
Outside IR35 | Contractor pays themselves via dividends and salary from their company, optimising tax and NICs |
Inside IR35 | Treated like an employee for tax; PAYE tax and NICs deducted at source by the fee-payer |
The shift can reduce net income by 20–30%, even though you don’t gain employee benefits like holiday pay or pension contributions.
Example Breakdown: Same Income, Different Outcome
Let’s meet Neville Cranshaw, a freelance DevOps engineer billing £500/day, working 5 days/week for 46 weeks a year.
Scenario | Outside IR35 | Inside IR35 |
Gross income | £115,000 | £115,000 |
Income Tax (2025 bands) | ~£27,000 (via salary/dividends mix) | ~£36,400 (PAYE) |
Employee NICs | ~£3,100 | ~£5,000 |
Employer NICs | £0 (paid from company profits) | £8,900 (paid by fee-payer, but may affect your rate) |
Net income | ~£84,900 | ~£66,000 |
➡️ Neville loses nearly £19,000/year in take-home pay when inside IR35.
🧠 Heads up: Many clients try to factor employer NICs into their contractor rates. If you're offered a lower day rate "due to NICs," question it.
Emergency Tax and IR35: The Hidden Sting
If you suddenly move inside IR35 or start working through an umbrella company, your first few payslips might be hit with emergency tax. That means HMRC uses a temporary tax code until they figure out your actual income situation.
What Causes Emergency Tax?
New job without a recent P45
Umbrella company or fee-payer not receiving correct tax details
Mid-year IR35 status change
Tax Codes to Watch For:
1257L W1/M1 – “Week 1/Month 1” basis: personal allowance reset every period
BR – Basic rate applied to all earnings (no allowance)
D0/D1 – Higher or additional rate tax applied to everything
🧾 You can check your current tax code here:www.gov.uk/check-income-tax-current-year
Example: Emergency Tax Nightmare
Imogen Witheridge, a freelance UX designer, switched to a new client under an umbrella company in Jan 2025. Her first payslip showed £4,000 in gross earnings—but only £1,900 net pay.
Why? She was on a BR tax code, meaning the umbrella deducted 20% tax on the full amount, with no personal allowance applied.
Imogen had to claim back over £1,200 through a PAYE refund—more on that next.
How to Reclaim Overpaid Tax Under IR35
Hey, don’t sweat it. If you’ve been overtaxed, there are clear ways to get your money back.
Option 1: Get Your Tax Code Updated Mid-Year
Check your payslip and tax code.
If incorrect, call HMRC at 0300 200 3300 or update your employment details online.
They’ll issue a corrected tax code to your employer or umbrella company.
Option 2: Claim a Refund After Year-End
If the tax year ends (April 5th) and you’ve been overtaxed:
File a Self Assessment or submit a refund claim via your Personal Tax Account.
HMRC usually processes refunds in 4–8 weeks.
Option 3: Contractor Company Claims
If your PSC was taxed inside IR35 incorrectly (e.g., your client treated you as outside but HMRC disagreed), your company might be eligible for a partial CT or PAYE refund—but this requires specialist advice and may involve a lengthy review.
How to Reclaim Overpaid Tax Under IR35
Optimising Finances While Inside IR35
Let’s be honest: inside IR35 isn't fun—but you still have some levers to pull.
Use Umbrella Companies Smartly
Choose a compliant umbrella listed on FCSA or Professional Passport.
Some umbrellas offer salary sacrifice pension schemes—letting you reduce tax/NIC liability.
Watch out for dodgy umbrellas promising “90% take-home” – HMRC cracks down hard on these.
Claim Legitimate Expenses (Limited in Scope)
Under IR35, you can’t claim the same business expenses as outside. But you can deduct:
Pension contributions via umbrella schemes
Professional indemnity insurance
Limited travel and subsistence (if not under supervision/control)
Consider Salary Sacrifice Pension Contributions
Adding to your workplace pension via salary sacrifice reduces:
Your gross salary
Your Income Tax and NICs
Win-win.
Avoiding the "Double Hit" – How to Price Inside IR35 Contracts
When negotiating rates under IR35, remember:
You’ll be hit with employee NICs
The client pays employer NICs (13.8%)
You lose dividend efficiency
➡️ Use online IR35 take-home calculators to reverse-engineer a fair day rate that matches your expectations. For example, if your net target is £80k/year, you may need to negotiate a £600+/day rate inside IR35 to match a £500/day outside contract.
Do You Still Need an Accountant?
Yes—especially if:
You operate a PSC with some inside and some outside contracts
You’re switching between umbrella work and limited company income
You’re claiming back tax or restructuring your pension
Accountants can also help challenge incorrect SDSs, file refund claims, and guide you on the best take-home structure for your situation.
Key Takeaways for Contractors in 2025
Check your tax code immediately if you move inside IR35.
Use salary sacrifice pensions to ease tax pressure.
Always price inside IR35 work higher to cover tax differences.
Challenge emergency tax swiftly—don’t let it drag for months.
Keep all payslips, SDSs, and contracts in case you need to dispute status or claim a refund.
IR35 for Employers – Responsibilities, Risk Mitigation, and Compliance in the 2025 Tax Landscape
If you're a UK business working with contractors in 2025, IR35 isn't just a contractor problem—it's very much yours too. With HMRC audits increasing and the cost of getting it wrong ranging from six-figure tax bills to reputational damage, IR35 compliance is now a frontline risk management issue.
Whether you’re a tech scale-up hiring your tenth DevOps consultant or a construction firm working with dozens of freelance surveyors, this part of the guide breaks down exactly what employers must do, where the common traps lie, and how to create an IR35 strategy that protects your business and keeps HMRC off your back.
Who Counts as an Employer Under IR35?
Technically, under IR35, the term “deemed employer” refers to whichever party is responsible for paying the contractor—this could be:
The end client, or
A recruitment agency, or
An umbrella company
⚠️ If you're the end client and there's no intermediary agency, you are both the engager and the fee-payer, so the tax liability lands squarely on your shoulders if IR35 is triggered.
Employer Responsibilities Under IR35 (Post-April 2021 Rules)
Since April 2021, medium and large-sized clients in the private and third sectors must:
Determine the IR35 status of every contractor
Provide a Status Determination Statement (SDS) with reasons
Apply reasonable care in making the decision
Have a dispute process in place
Deduct PAYE Income Tax and NICs if the role is inside IR35
Pay employer NICs and Apprenticeship Levy (if applicable)
These aren’t optional.
🚨 Failing to issue an SDS, or issuing one without care, makes the client liable for ALL tax due—even if you used an agency.
The High Stakes of Getting It Wrong
Let’s put the risk into numbers.
Real Case: A Government Department in 2022
The Department for Work and Pensions (DWP) was fined £87.9 million for IR35 non-compliance between 2017 and 2021. Why? Poor status determinations and lack of proper processes.
Private companies aren’t immune either—banks, pharma firms, and energy companies have all faced seven-figure tax reassessments due to IR35 errors since 2021.
📌 Key Risk Factors for Employers:
Blanket assessments (declaring all contractors “inside IR35” without review)
Lack of a formal IR35 process
Not revisiting status when contracts are extended or renewed
Not applying PAYE deductions correctly when required
How to Conduct a Proper IR35 Status Determination
Use the CEST tool if you must, but don’t rely on it blindly. Here's a better process:
Step 1: Gather the Facts
Contract details
Actual working practices
Line manager input (they’ll know if the contractor’s treated like staff)
Step 2: Apply the Status Tests
Substitution – Can they send a replacement?
Control – Who decides what work is done and how?
MOO (Mutual Obligation) – Are you obligated to provide work continually?
Step 3: Draft the SDS
State “inside” or “outside” IR35
Include the reasoning behind the decision
Deliver the SDS to both the contractor and the fee-payer (if applicable)
Step 4: Be Ready for a Challenge
Contractors can dispute the status
You must respond within 45 calendar days
Keep a documented trail for every determination
How to Conduct a Proper IR35 Status Determination
Reasonable Care: What It Actually Means
HMRC has made it clear: tick-box assessments, copy-paste SDSs, or blanket decisions do not count as reasonable care.
✅ HMRC expects:
Tailored assessments per contract
Internal IR35 training
Use of external advisors if unsure
SDSs that are clear, evidence-based, and signed off internally
Employer NICs and Financial Planning for Inside IR35 Contractors
If a contractor is deemed “inside IR35,” the fee-payer (often you) must:
Deduct PAYE tax and employee NICs from the contractor’s gross fee
Pay 13.8% employer NICs (on earnings above £9,100/year)
Pay the Apprenticeship Levy if your annual payroll exceeds £3 million
➡️ These are not optional—even if your contract says the agency is responsible, HMRC may come to you if they don’t pay up.
🧾 Pro tip: Budget for these costs on top of the agreed contractor fee—never assume the contractor will “absorb” them.
How to Avoid Misclassification and Reduce Risk
Here’s how savvy firms are staying compliant (without blowing the contractor budget):
1. Build an IR35 Policy
Define when and how status is assessed
Create internal checklists
Assign responsibility (usually HR or finance)
2. Train Your Line Managers
Most misclassifications happen because managers treat contractors like employees—this kills your “outside IR35” case.
Train them to:
Avoid including contractors in team meetings that aren’t project-based
Not dictate working hours or tools
Understand the real difference between staff and freelancers
3. Use External IR35 Review Services
There are third-party services (like Qdos, Kingsbridge, Bauer & Cottrell) that:
Assess your contractor roles
Draft bulletproof SDSs
Offer IR35 insurance to cover tax liability if HMRC challenges you
4. Keep Audit Trails
If you’re ever investigated, you’ll need to show:
Your SDS decisions
The logic behind them
How you responded to contractor challenges
Payroll records showing deductions and payments
📂 Keep this for at least 6 years, just like regular tax records.
How to Avoid Misclassification and Reduce Risk
What About Small Companies?
If your business meets two out of three of the following thresholds, you are a small company under IR35 rules:
Threshold | 2025 Definition |
Annual turnover | ≤ £10.2 million |
Balance sheet total | ≤ £5.1 million |
Employees | ≤ 50 |
If you're small, you’re off the hook for making SDSs—the contractor decides their IR35 status.
But HMRC still expects you to be honest and cooperative if asked about working practices.
Bonus: IR35 and Hybrid/Remote Teams
The pandemic ushered in remote work—but it created a grey area for IR35 too.
Remote contractors can still be inside IR35 if:
They’re working 9–5 on Zoom every day with your team
You’re directing their tasks daily
They’re using your internal systems and tools like employees
Remote ≠ outside IR35.
Make sure your SDS accounts for remote working dynamics—especially around control and substitution.
Key Takeaways for Employers in 2025
You’re on the hook for status determinations, SDSs, and correct tax treatment.
Don’t assume CEST alone is enough—it’s a starting point, not a defence.
Train your people, document everything, and budget for NICs on inside IR35 contracts.
Don’t risk a blanket approach—each contract must be assessed individually.
Use professional reviews and IR35 insurance to cover your bases.
Mastering Mixed IR35 Portfolios – How Contractors and Businesses Handle ‘Inside’ and ‘Outside’ Contracts Together
In today’s gig-heavy UK economy, contractors often switch between IR35 statuses, sometimes even within the same tax year. And employers often use a hybrid model: some freelancers outside IR35, others inside via umbrella or agency PAYE.
This final part gives you a clear playbook to manage mixed IR35 portfolios like a pro—without triggering HMRC flags, overpaying tax, or losing financial clarity.
Why Mixed IR35 Portfolios Are Now the Norm
Let’s take Tristram Ockenden, a cybersecurity consultant:
January–March 2024: Worked with an energy client inside IR35 (via umbrella).
April–September 2024: Took contracts outside IR35 via his PSC.
October 2024–January 2025: Back to an inside contract with a fintech client.
March 2025: A short 3-week outside engagement.
This isn’t rare—it’s increasingly common. But every change has tax, admin, and compliance consequences.
Tax Treatment for Contractors with Mixed Status
How Income Is Treated:
Contract Type | How It's Taxed | Declared On |
Inside IR35 (PAYE) | Income Tax + NIC deducted by client/umbrella | PAYE – shown on P60/P45 |
Outside IR35 (PSC) | Paid gross to your company | Declared via company accounts + dividends |
Umbrella work | Umbrella deducts all taxes | Payslip + P60 |
So if you work both inside and outside in the same year, you might:
Receive a PAYE income from one or more umbrella companies or clients
Also withdraw salary/dividends from your PSC
You must reconcile both when filing your Self Assessment.
🧾 HMRC will expect full disclosure of:
Umbrella P60/P45 income
Dividends and salary from your company
Any overlap (e.g. dual contracts)
Key Self Assessment Considerations
1. Use Your Personal Tax Account
Check your cumulative income via:🔗 https://www.gov.uk/personal-tax-account
Make sure:
All employers are listed
Income figures align with payslips and P60s
Dividend payments are declared separately
2. Claim Back Emergency Tax
If part of your inside IR35 work was taxed incorrectly (e.g. wrong code or emergency tax), you can claim a refund through your Self Assessment return—or directly via HMRC if you're not required to file.
3. Don’t Double-Claim Expenses
You can’t claim:
Mileage via your umbrella AND
The same expense via your PSC
Stick to one set of allowable expenses per income stream.
Key Self Assessment Considerations
Organising Your Books as a Contractor
Here’s how to keep things tidy (and HMRC-proof):
Income Source | Action |
PSC (outside IR35) | Use accounting software (e.g., FreeAgent, QuickBooks). Log invoices, expenses, dividends, and payroll. |
Inside IR35 (PAYE) | Keep payslips, SDSs, umbrella P60s. No need to invoice; you're taxed at source. |
Umbrella | Store all payslips and expense reports. Ensure they align with tax codes and P60s. |
All roles | Log start/end dates, client names, SDSs, and contract details. |
📁 Keep everything for at least 6 years, per HMRC rules.
For Businesses: Managing a Hybrid Workforce
If you’re a business juggling outside IR35 consultants and Inside IR35 contractors, your risk increases—especially if you’re inconsistent.
Here’s What You Need to Get Right:
✅ Assess Every Role Separately
Never assume one IR35 status applies to all roles or departments.
Even similar job titles may have different IR35 statuses depending on control, substitution, and obligation.
✅ Have a Contractor Framework Create an internal guide on:
Who does IR35 assessments
When they’re reviewed (e.g. at contract renewal)
How SDSs are issued and stored
✅ Monitor ‘Role Creep’ A contractor who starts off outside IR35 can drift “inside” if:
They’re retained long-term
They're included in team meetings or HR processes
They lose independence over deliverables
Review contracts quarterly if they span longer than 6 months.
✅ Consolidate Payment Systems
Pay outside IR35 workers via accounts payable (invoice-based)
Use PAYE payroll or umbrella payments for inside IR35
Don’t mix them—HMRC sees that as a red flag
Combining IR35 Roles with Other Income Streams
Some professionals mix contractor work with:
Part-time employment
Investment income
Rental property
You’ll need to declare everything on your Self Assessment and understand how tax thresholds interact.
Example: Mixed Income for 2024/25
Income Type | Amount | Tax Treatment |
Inside IR35 PAYE | £35,000 | Taxed at source |
Outside IR35 via PSC | £45,000 | Salary + dividends |
Rental Income | £8,000 | Declared via SA |
Dividends | £5,000 | First £500 tax-free, rest taxed at 8.75%/33.75%/39.35% |
Total: £93,000 – triggers higher-rate tax band, reduces Personal Allowance, impacts NICs and dividend tax.
IR35 Insurance for Hybrid Contractors
If you’re juggling statuses, it’s worth investing in IR35 defence insurance. Many providers now offer:
SDS challenge cover
HMRC investigation legal support
Some include contract reviews and real-time status checks
Look for insurers regulated by the FCA or firms like:
Qdos Contractor
Kingsbridge
Bauer & Cottrell
IR35 Strategy: 2025 Checklist for Contractors
✅ Maintain accurate records for each income stream
✅ Keep contracts and SDSs for each engagement
✅ Use separate business accounts for PSC income vs PAYE salary
✅ Check all tax codes after switching between umbrella/PSC
✅ Consider using a specialist accountant for mixed-status portfolios
IR35 Strategy: Checklist for Contractors
IR35 Strategy: 2025 Checklist for Employers
✅ Map all contractor roles and statuses
✅ Reassess IR35 status on contract renewal or scope change
✅ Use dedicated payroll systems for PAYE/umbrella
✅ Offer status challenge process in line with HMRC rules
✅ Store all SDSs and status logs for at least 6 years
IR35 Strategy: Checklist for Employers
Wrapping Up: Future-Proofing Against IR35 Risks
IR35 isn’t going away—in fact, HMRC is increasing its enforcement activity in 2025 and beyond. But whether you’re a contractor or a client, the key to surviving (and thriving) under IR35 is simple:
Be organised. Be proactive. Be honest.
By understanding how to manage inside and outside IR35 contracts, claim tax back when needed, avoid double taxation, and maintain clean compliance logs, you’ll be miles ahead of the curve.
Summary of the Most Important Points Mentioned In the Above Article
IR35 determines whether a contractor should be taxed as an employee, and if so, PAYE and NICs must be applied by the fee-payer.
The responsibility for determining IR35 status lies with the client unless the client qualifies as a 'small business' under HMRC rules.
HMRC’s CEST tool can assist in status decisions but must be used accurately and supported by real-world working practices.
Contractors working inside IR35 typically see a 20–30% drop in take-home pay due to Income Tax and NIC deductions.
Emergency tax codes are common during IR35 transitions, but overpaid tax can be reclaimed through HMRC or Self Assessment.
Clients must provide a Status Determination Statement (SDS) with clear reasoning and allow disputes within 45 days.
Failing to apply IR35 rules properly can result in six-figure tax liabilities, as seen in several public and private sector cases.
Contractors and businesses managing mixed IR35 statuses must maintain clear, separate records and avoid blending PAYE and PSC income.
Using umbrella companies or salary sacrifice pension schemes can help optimise tax efficiency while remaining compliant.
HMRC expects clients and contractors to apply reasonable care, document every decision, and stay audit-ready for at least 6 years.
FAQs
Q1. What is the penalty if your company fails to provide an SDS under IR35 rules?
A. If your company fails to issue a Status Determination Statement when required, HMRC may hold it liable for all unpaid tax and National Insurance Contributions, plus penalties and interest.
Q2. Can you be simultaneously employed and work through a PSC under IR35?
A. Yes, you can be both a PAYE employee and operate through a PSC; however, each engagement must be assessed separately for IR35 compliance.
Q3. How do you report inside IR35 income on a Self Assessment tax return?
A. Inside IR35 income is usually taxed via PAYE, but you must still declare it in your employment section of the tax return, along with your unique employer reference number.
Q4. Can you use the same contract template for both inside and outside IR35 roles?
A. No, contracts should be tailored to reflect the actual working arrangement; using a one-size-fits-all template can lead to misclassification and HMRC penalties.
Q5. Are inside IR35 contractors eligible for statutory benefits like sick pay or maternity leave?
A. No, being taxed like an employee under IR35 does not entitle you to statutory benefits unless you are directly employed or contracted through an umbrella offering such benefits.
Q6. Can you challenge an IR35 status determination through HMRC directly?
A. No, you must first raise your dispute with the client; HMRC will only intervene after all internal dispute procedures are exhausted.
Q7. Does IR35 apply to sole traders or only limited companies?
A. IR35 does not apply to sole traders because there is no intermediary; instead, standard employment status rules apply.
Q8. Can a company be exempt from IR35 if it outsources all contractor hiring to an agency?A. No, even if an agency is used, the end client remains responsible for the IR35 status assessment unless classified as a small company.
Q9. Are there any industries where IR35 is more likely to be enforced?
A. Yes, HMRC pays closer attention to sectors like IT, healthcare, oil & gas, and financial services due to frequent use of limited company contractors.
Q10. What happens if you ignore an SDS and continue operating as if you're outside IR35?
A. Ignoring an SDS and invoicing without PAYE deductions can trigger an HMRC compliance check and result in backdated tax liabilities and fines.
Q11. Can contractors claim redundancy pay when inside IR35 contracts end?
A. No, IR35 does not provide employee rights such as redundancy pay, regardless of tax treatment.
Q12. Is it legal to negotiate higher rates to offset inside IR35 taxation?
A. Yes, contractors often negotiate higher daily rates for inside IR35 roles to account for increased tax burdens, provided the terms are clear and fair.
Q13. Can your accountant help you appeal an incorrect IR35 determination?
A. Yes, a tax specialist or accountant can assist in reviewing the SDS, gathering evidence, and formally challenging the client’s determination.
Q14. How does IR35 apply if you work for a UK client while living abroad?
A. If the client is UK-based and you have UK tax residency or the work is carried out in the UK, IR35 may still apply regardless of your location.
Q15. Can umbrella companies avoid IR35 scrutiny from HMRC?
A. Yes, IR35 doesn’t apply to umbrella employees since they’re already taxed under PAYE; however, the umbrella itself must be compliant.
Q16. Does IR35 apply if your PSC is dormant for part of the year?
A. IR35 applies only when the PSC is active and receiving income through contracts that meet the employment test; dormant companies are exempt.
Q17. Are there any HMRC-approved insurance products to protect against IR35 investigations?
A. Yes, specialist insurers like Qdos and Kingsbridge offer HMRC-recognised cover for IR35 legal defence and potential tax liabilities.
Q18. Can you use dividend income to pay Employer NICs under inside IR35 rules?
A. No, Employer NICs are the responsibility of the fee-payer, not covered by your company’s dividend payments.
Q19. Are repeat contractors to the same client automatically classed as inside IR35?
A. No, repeat engagements must still be assessed on a case-by-case basis, although long-term relationships increase scrutiny risk.
Q20. Does switching from a PSC to umbrella mid-contract reset your IR35 status?
A. No, switching to an umbrella company simply changes how you're taxed; the underlying working relationship with the client still matters for compliance records.
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