If you’re a freelancer, contractor, or a small business owner operating through a limited company, you’ve probably heard the term “IR35” floating around — and with good reason. This piece of UK tax legislation can significantly impact your income, take-home pay, and the way you structure your contracts and working relationships.

Whether you’re new to freelancing or a seasoned contractor, understanding IR35 is essential for staying compliant and avoiding unexpected tax bills. This guide will walk you through everything you need to know about IR35, including how it applies to fixed-term contracts, self-employed professionals, and those working as part of a limited company.

• What is IR35?
• Who Does IR35 Affect?
• IR35 for Freelancers and Contractors
• IR35 for Fixed-Term Contracts
• Does IR35 Affect Limited Companies?
• IR35 Status Determination: Inside vs Outside IR35

What is IR35?

IR35, officially known as the Intermediaries Legislation, is a set of tax rules introduced by HMRC in 2000. The aim is to prevent individuals from avoiding tax by working as “disguised employees” through their own limited company, even though they function like full-time employees for a single client.

If HMRC determines you fall inside IR35, you must pay income tax and National Insurance Contributions (NICs) similar to a regular employee. If you’re outside IR35, you’re considered genuinely self-employed and can continue to benefit from the tax efficiencies of running a limited company.

Who Does IR35 Affect?

IR35 affects a wide range of professionals, particularly:

• Freelancers
• Contractors
• Healthcare professionals
• Small businesses

If you operate through a limited company and provide services to a client, IR35 could impact your tax liabilities.

It’s especially relevant to individuals:

• On long-term contracts
• Working regular hours for a single client
• Using company tools or premises
• Having their work directed or supervised by the client

IR35 for Freelancers and Contractors

IR35 for freelancers or contractors depends on how they engage with clients. If you provide services through a limited company, HMRC may scrutinise your working arrangements. If it looks like you’re functioning as an employee — even if your business is structured differently — IR35 could apply.

Key IR35 Indicators for Freelancers

Asking yourself the below questions can help you determine whether you fall inside or outside of IR35:

Control: Does the client dictate how and when you work?

Substitution: Are you the only person able to complete the job?

Mutuality of Obligation (MOO): Is the client obliged to offer work, and are you obliged to accept it?

If the answer to most of the above is “yes,” you may fall inside IR35.

How Freelancers & Contractors Can Stay Compliant

• Use an IR35 contract review service
• Retain records of communication and work practices
• Ensure contracts reflect your independent status
• Avoid long-term, open-ended engagements without clear deliverables

IR35 for Fixed-Term Contracts

Many freelancers and contractors work on fixed-term contracts. These arrangements can easily fall within IR35 if they mimic traditional employment relationships.

Signs that a fixed-term contract might be caught by IR35:

• You’re embedded within the team
• You receive instructions like an employee
• You lack autonomy over working hours or methods
• You’re listed on the company’s internal systems

Best Practices for Fixed-Term Contractors

• Clarify in your contract that the relationship is business-to-business
• Avoid terminology that suggests employment (e.g. “job title”, “line manager”)
• Define project milestones and end dates clearly

Does IR35 Affect Limited Companies?

IR35 does affect limited companies, specifically Personal Service Companies (PSCs). When working through a limited company, you’re typically paid in a mix of salary and dividends to reduce your tax liability. IR35 removes these tax advantages if you’re deemed a disguised employee.

IR35 Responsibility (Private vs Public Sector)

Public sector (since 2017): The client determines IR35 status

Medium and large private sector clients (since 2021): They are also responsible

Small private companies: The responsibility remains with the contractor

So if you’re working with a small private client, your company must still assess and manage your IR35 status.

IR35 Status Determination: Inside vs Outside IR35

Understanding the difference between inside and outside IR35 is crucial, find out below if you fall under the inside or outside category:

Inside IR35

• You’re considered a disguised employee
• Must pay full income tax and NICs just like an employee
• Fewer take-home earnings

Outside IR35

• You’re genuinely self-employed
• Can continue to benefit from dividends and tax planning
• Greater control over how, when, and where you work

To determine which category you fall under, HMRC offers a tool called CEST (Check Employment Status for Tax), which asks questions about your engagement and working practices and gives a status outcome. However, it does not always factor in Mutuality of Obligation therefore getting expert advice from an accountant is essential.

Key Takeaways for IR35 Freelancers and Contractors

• IR35 is designed to prevent disguised employment where freelancers or contractors avoid PAYE taxes.
• It affects those operating through limited companies, particularly Personal Service Companies.
• Whether you fall inside or outside IR35 depends on factors like control, substitution, and mutuality of obligation.
• The responsibility for determining IR35 status now falls on the client in most sectors — except for small private businesses.
• IR35 applies to fixed-term contracts that resemble traditional employment arrangements.
• If you fall inside IR35, you’ll have to pay taxes similar to a full-time employee, reducing take-home pay.
• Getting professional advice and contract reviews can help you remain compliant and protect your income.

IR35 FAQs

What is IR35 for freelancers?

IR35 for freelancers refers to the tax legislation that determines whether a freelancer working via a limited company is genuinely self-employed or effectively an employee. If deemed to be working as a disguised employee, the freelancer may need to pay standard employee tax and NICs.

Does IR35 affect limited companies?

Yes, IR35 affects limited companies, especially when the business is structured as a Personal Service Company. If HMRC determines that a contract falls inside IR35, the limited company may lose access to tax-efficient salary and dividend arrangements.

How do I know if I’m inside or outside IR35?

To determine your IR35 status, consider three main factors:

• Control over how and when you work
• Your right of Substitution (can someone else do the job?)
• The presence of Mutuality of Obligation (MOO)

You can also use HMRC’s CEST tool, but for the most reliable results, seek a professional IR35 contract review, such as those offered by Nexus Accounting.

Ready to Receive Expert Support Regarding IR35? Nexus Accounting Can Help

Understanding IR35 is essential for freelancers, contractors, and limited company directors. Whether you’re operating under a fixed-term contract, managing multiple clients, or working long-term with a single company, knowing your IR35 status can protect your income and help you avoid penalties.

At Nexus Accounting, our team of experienced accountants are equipped with the knowledge and skills to assist you operating as a freelancer or contractor when it comes to working out your IR35 status. Take a look at our accountancy package to find out how we can help you. Contact us today.