NOT financial advice - seek advice from a professional for your specific situation

    TaxKilnUK tax guidance
    TaxKilnUK tax guidance

    IR35 / Off-Payroll Working

    IR35 is the UK's anti-avoidance framework targeting 'disguised employment', where an individual provides services through a Personal Service Company (PSC) but, had they contracted directly with the end client, would have been treated as that client's employee for tax purposes. Operates via TWO chapters of ITEPA 2003: **CHAPTER 8** (April 2000), worker/PSC SELF-ASSESSES status + PSC accounts for PAYE + employer NIC if inside IR35. **CHAPTER 10** (April 2017 public sector / April 2021 private sector), END CLIENT assesses status + issues STATUS DETERMINATION STATEMENT (SDS); FEE-PAYER deducts PAYE + employee NIC from deemed employment payment + pays employer NIC (15% from April 2025). **Small business exemption**: Chapter 10 doesn't apply if end client is small per Companies Act 2006 (turnover ≤£10.2m, balance sheet ≤£5.1m, ≤50 employees, two of three for two consecutive years). **APRIL 2026 THRESHOLD CHANGE**: Companies Act thresholds rise (turnover £15m, balance sheet £7.5m, headcount unchanged), ~132,000 companies expected to flip from medium to small status, reverting Chapter 8 assessment responsibility to contractor PSCs. **FINANCE ACT 2024 SECTION 17 SET-OFF**: resolves the double-tax problem. Where HMRC reassesses an engagement as inside IR35, corporation tax + dividend tax already paid by PSC are set off against fee-payer's PAYE liability. Retrospective to April 2017 public / April 2021 private; trigger events from 6 April 2024+. EMPLOYER NIC NOT eligible for set-off.

    Last reviewed:

    Guidance, not advice. We explain the rules, we don't assess your situation. Always seek financial or tax advice from your accountant, or contact HMRC. Read our editorial scope →

    What this relief is, in plain English

    IR35 is the UK's framework for ensuring people who work like employees pay tax like employees, even when they provide services through a personal service company. Two chapters of ITEPA 2003 deliver this: Chapter 8 (2000) puts the assessment burden on the worker; Chapter 10 (2017/2021) shifts it to the end client. **Chapter 10 architecture (post-2017/2021)**: End client assesses status + issues SDS. Fee-payer (party paying PSC) deducts PAYE + employee NIC + pays employer NIC. PSC receives net payment + still pays corporation tax. Substantial cash-flow + administrative impact on contractor PSCs. **Chapter 8 (continues for small-business clients + overseas clients)**: PSC self-assesses + accounts for PAYE on deemed employment payment + pays employer NIC. Worker bears the assessment responsibility + risk. **Small business exemption** is the key gateway between Chapter 8 + Chapter 10. Currently Companies Act 2006 thresholds (£10.2m turnover, £5.1m balance sheet, 50 employees, two of three for two consecutive years). **April 2026 change** raises turnover + balance sheet thresholds substantially, ~132k previously-medium-sized companies expected to flip to small status. For their contractors: assessment responsibility reverts from Chapter 10 (client) to Chapter 8 (worker/PSC). **Finance Act 2024 Section 17 set-off** resolves the historical double-tax problem on HMRC reassessment. Income tax + corporation tax + dividend tax already paid by PSC + worker now set off against fee-payer's PAYE liability. Employer NIC NOT eligible for set-off, only employee taxes. Retrospective to April 2017 / April 2021. Substantial reform for HMRC enforcement + settlement dynamics. **Status determination factors** (from Ready Mixed Concrete + reaffirmed by Supreme Court PGMOL 2024): mutuality of obligation; personal service / substitution right; sufficient control; financial risk; integration; business on own account. No single factor decisive, multi-factorial assessment at Stage 3 is where most cases are won or lost. **HMRC's CEST tool** (Check Employment Status for Tax) is the official online diagnostic. HMRC says it will 'stand behind' CEST results given accurate inputs. Critics highlight CEST's MOO-assumption design + inability to handle borderline cases.

    How it works

    Chapter 8, worker-assessed (original 2000 regime)

    Worker/PSC self-assesses each engagement. If inside IR35: PSC operates PAYE on 'deemed employment payment' (95% of gross receipts less salary + employer NIC). PSC pays employer NIC (currently 15% from April 2025). RTI + Self Assessment reporting. Continues to apply where Chapter 10 doesn't, small-business clients, overseas clients, no qualifying intermediary.

    Chapter 10, client-assessed (off-payroll, 2017/2021)

    End client assesses status + issues Status Determination Statement (SDS) to worker + agency before any payment. Fee-payer (party contracting with PSC) deducts PAYE + employee NIC from deemed employment payment + pays employer NIC + Apprenticeship Levy where applicable. PSC receives net payment + retains corporation tax obligation on the income. If SDS not validly issued: end client becomes deemed employer + bears primary liability.

    Small business exemption + April 2026 threshold change

    Chapter 10 doesn't apply if end client qualifies as 'small' under Companies Act 2006. Current thresholds (two-of-three for two consecutive years): turnover ≤£10.2m; balance sheet ≤£5.1m; ≤50 employees. **From 6 April 2026**: turnover ≤£15m; balance sheet ≤£7.5m; ≤50 employees. ~132,000 companies expected to flip from medium to small status, their contractors revert to Chapter 8 (worker/PSC assesses).

    Finance Act 2024 set-off (from 6 April 2024)

    Section 17 FA 2024 + PAYE Regulations 2024. HMRC can set off worker/PSC's already-paid income tax + corporation tax + dividend tax against fee-payer's PAYE liability on reassessment. Employer NIC NOT eligible. Retrospective to April 2017 (public) / April 2021 (private) for deemed payments where trigger event (Reg 80 determination, settlement, recovery notice) occurs from 6 April 2024+. Pre-April-2024 closed settlements can't be reopened. 30-day right of appeal for worker/PSC against direction notice.

    Who qualifies

    Interactions with other reliefs

    Employment Allowance

    Personal service companies subject to IR35 / off-payroll determination typically excluded from Employment Allowance via the sole-director trap. Deemed-employment payments under off-payroll rules don't generate qualifying Class 1 NIC for Employment Allowance purposes.

    Director's Loan Account + s.455

    IR35-affected PSCs face complex DLA dynamics, deemed-employment payments reduce extractable income; cash flow gaps may push DLA overdrawn into s.455 territory. Careful management of DLA + extraction routes essential in IR35 environment.

    Workplace Pension Employer Contributions

    Employer pension contributions paid by PSC remain CT-deductible + zero-NI extraction route regardless of IR35 status. Where Chapter 10 deemed-employment income reduces extractable cash, pension contributions remain a viable + tax-efficient alternative.

    Trading Allowance / Cash Basis

    Sole-trader contractors (no PSC) operate outside IR35 entirely, IR35 specifically targets corporate-wrapped service provision. Some contractors choose to dis-incorporate + operate as sole traders to avoid IR35 complexity, accepting the personal income tax exposure on all earnings instead.

    Common mistakes + audit triggers

    Worked example

    Sanjay, Manchester - IT contractor via personal service company, engagement reassessment + April 2024 set-off mechanism (Reassessment in 2025/26 covering 2021/22-2023/24)

    Sanjay's Manchester PSC provided IT services to a medium-sized UK client throughout 2021/22-2023/24 (£75k/year, classified outside IR35 by the client). PSC paid corporation tax + Sanjay extracted via dividend. HMRC compliance check in 2025/26 reassesses the engagement as inside IR35 retrospectively for 2021/22 onwards. End client / fee-payer faces PAYE + NIC liability. Section 17 set-off applies.

    Calculation: **Pre-set-off position (HMRC reassessment for 2021/22-2023/24):** Deemed employment income £75k/year × 3 years = £225,000 total. Fee-payer (end client) PAYE liability on this: ~£40,000/year × 3 = £120,000. Employer NIC: ~£11,000/year × 3 = £33,000. Total fee-payer exposure: ~£153,000. **Pre-April-2024 (without set-off): worker's already-paid taxes**: Corporation tax paid by Sanjay's PSC: 19% × £75k × 3 = £42,750 (assuming SPR pre-marginal-band). Dividend tax paid by Sanjay on extractions: ~£15,000/year × 3 = £45,000. Worker income tax paid on minimal salary: ~£0 (typical PSC structure). Total worker-side taxes already paid: ~£87,750. **Pre-April-2024 double-tax problem:** total economic taxation on £225k of income = £153k (fee-payer) + £87.75k (worker) = £240.75k vs ~£100k under proper employment treatment. DOUBLE TAX. **Post-April-2024 set-off (FA 2024 s.17), applicable as reassessment triggers in 2025/26 (post-April-2024):** Eligible for set-off: £42,750 CT + £45,000 dividend tax = £87,750. Not eligible: employer NIC paid by PSC. Set-off applied against fee-payer's £153,000 liability. Fee-payer's net liability: £153,000 - £87,750 = **£65,250**. Sanjay's PSC retains the £45k dividend tax as final + can't reclaim it independently. Sanjay's PSC retains the £42,750 CT (similarly fixed). **Worker side: 30-day appeal right against HMRC direction notice (whether set-off correctly calculated).** **Practical result:** Fee-payer liability reduces from £153,000 to £65,250 (a £87,750 reduction matching the set-off). Worker/PSC's previously-paid taxes effectively absorbed into the fee-payer's PAYE bill. Net UK tax revenue on the £225k of disputed income approximately matches proper employment treatment. Double-tax problem resolved (substantially) for trigger events from 6 April 2024. **Strategic implications:** 1. HMRC enforcement deterrent reduced, set-off makes reassessment less economically catastrophic for fee-payer + agency populations. 2. Pre-April-2024 closed settlements can't be reopened, historical double-tax positions remain (though many were never settled because of the double-tax leverage argument). 3. April 2026 small-business threshold change: if the end client becomes small from 2026/27, Sanjay's contracting reverts to Chapter 8, Sanjay assesses status going forward + bears risk in his PSC. 4. CEST refreshed April 2025 (UI update only); underlying logic unchanged, Sanjay can use it but tribunal cases continue to apply Ready Mixed Concrete multi-factorial assessment. **Documentation:** - Original SDS from end client (Chapter 10 evidence) - PSC accounting records showing CT + dividend tax paid - HMRC's Regulation 80 determination + direction notice on set-off calculation - 30-day appeal preserved if worker disputes set-off amount - Six-year retention for HMRC enquiry; longer for careless/deliberate behaviour disputes.

    Statute reference: Income Tax (Earnings and Pensions) Act 2003 + Finance Act 2024 ITEPA 2003 Chapter 8 + Chapter 10 of Part 2; FA 2024 s.17 (set-off). HMRC manual: ESM0500 onwards (Employment Status Manual).

    Frequently asked questions

    What happens if I miss the Self Assessment deadline?+
    The Self Assessment deadline is 31 January (online filing) for the previous tax year. Miss it and HMRC apply an automatic £100 penalty. Beyond that: £10 per day from 3 months late (capped at £900), 5% of tax due at 6 months late, and another 5% at 12 months late, under Schedule 55 of the Taxes Management Act 1970. If you have a genuine reason (serious illness, bereavement, technical issue with HMRC's systems) you can appeal with evidence; HMRC accepts reasonable excuse appeals in most genuine cases.
    Do I need an accountant or can I file Self Assessment myself?+
    Legally you can file Self Assessment yourself via gov.uk for free, most simple sole-trader returns (single income source, basic expenses) are realistic to self-file. An accountant adds real value when: your trading profit is above £40,000 (extraction-strategy decisions matter), you have multiple income streams (PAYE + self-employment + property + dividends), you've crossed the £90,000 VAT threshold, you're considering incorporation, or you have an HMRC enquiry. Expect to pay £400-£1,500/year for a typical sole-trader accountant; the cost is itself a deductible expense.
    How do payments on account work?+
    When your Self Assessment tax bill exceeds £1,000 for the first time, HMRC requires payments on account toward NEXT year's tax. Half the current bill is due 31 January (alongside the current bill); the other half is due 31 July. So your first January after crossing the threshold can hit with a double-bill: last year's balance + first payment on account. Adjust via Form SA303 if you expect next year's income to drop substantially. Payments on account don't apply if more than 80% of your tax is collected via PAYE.
    What's the practical difference between Chapter 8 + Chapter 10?+
    **Chapter 8 (April 2000)**: WORKER/PSC self-assesses each engagement. If inside IR35, PSC operates PAYE on a 'deemed employment payment' (broadly 95% of gross receipts less salary + employer NIC). PSC pays employer NIC. Worker liability via PSC. **Chapter 10 (April 2017 public / April 2021 private)**: END CLIENT assesses + issues SDS to worker + agency. FEE-PAYER (party paying PSC) deducts PAYE + employee NIC at source + pays employer NIC. PSC receives net payment + retains corporation tax obligation on the income. **Key practical consequences**: Under Chapter 10, contractor PSC gets net payment after tax, substantial cash-flow + planning impact. Under Chapter 8, PSC receives gross + manages tax through its own PAYE system. April 2026 small-business threshold change will revert ~132k clients to Chapter 8, meaning many contractors will move from Chapter 10 (client decides) to Chapter 8 (worker decides) status assessment.
    How does the Finance Act 2024 set-off resolve the double-tax problem?+
    **Pre-April 2024 problem**: HMRC compliance check determines worker incorrectly classified as 'outside IR35'. Deemed employer (end client or agency) becomes liable for PAYE + NICs on deemed employment payments. BUT worker's PSC had ALREADY paid corporation tax on the income + worker had paid dividend tax on extraction. Same economic income taxed TWICE, once as corporate/dividend, once as deemed employment. **Section 17 FA 2024 mechanism (from 6 April 2024)**: HMRC can set off the worker/PSC's already-paid taxes against the deemed employer's PAYE liability. Eligible amounts: income tax paid by worker; corporation tax paid by PSC; dividend tax on extractions. **NOT eligible**: employer NIC paid by PSC (explicitly excluded). **Retrospective**: applies to deemed payments from April 2017 (public) / April 2021 (private) if trigger event (HMRC determination, settlement, recovery notice) occurs from 6 April 2024+. Pre-April-2024 closed settlements can't be reopened. **Practical impact**: substantially reduces deemed employer's exposure on reassessment + reduces pre-litigation settlement leverage of the double-tax argument.
    What are the key Ready Mixed Concrete factors for status determination?+
    **Three-stage test from Ready Mixed Concrete (1968)**, reaffirmed by Supreme Court PGMOL (2024): **Stage 1, Mutuality of Obligation (MOO)**: obligation on worker to perform + obligation on client to pay. Personal service requirement (substitution can negate). **Stage 2, Sufficient Control**: client has lawful authority to direct what / how / when / where work is done (not necessarily micromanaging, just having the right). **Stage 3, Multi-Factorial Assessment**: all other factors, substitution right (genuine vs paper); financial risk; equipment provision; integration into client's organisation; business-on-own-account; multiple clients; professional indemnity insurance; invoicing vs payslip mechanic. **No single factor decisive**. Each engagement assessed individually. PGMOL Supreme Court confirmed MOO can exist in short engagement (referee accepting match through report submission). **Substitution**: the most-contested factor. UNFETTERED right to substitute (client agnostic) → strong self-employment indicator. CONSENT-REQUIRED substitution → consistent with personal service / employment. Realistic vs contractual fiction matters.
    What recent IR35 case law affects the position?+
    **Supreme Court PGMOL v HMRC (2024)**: confirmed three-stage Ready Mixed Concrete test; MOO can exist in short engagement; control can be evidenced by structured framework not just day-to-day supervision. **Court of Appeal Atholl House (Kaye Adams)**: multi-factorial Stage 3 assessment essential; wider working patterns (multiple clients, independent business) legitimately considered at Stage 3 if known to both parties at contracting. **FTT Kickabout Productions (Paul Hawksbee, Talksport)**: status reversed in favour of taxpayer at FTT, illustrating that broadcaster relationships can fall either side of the line. **FTT Stuart Barnes / S&L Barnes (Sky Sports)**: rugby pundit status determination. **Gary Lineker / GS Lineker Trust**: partnership status interaction with IR35. **HMRC v Atholl House remittal**: ongoing procedural development. **Practical pattern**: media + sport contractor cases are heavily litigated; FTT decisions split roughly 60/40 in favour of taxpayer over recent years for borderline media engagements; IT contracting cases settle more commonly without litigation. HMRC's CEST tool refreshed April 2025 (UI restructured into 6 sections) but underlying logic unchanged, widely criticised for assuming MOO + ignoring borderline cases.

    Last reviewed: