Limited Company Tax for Directors / Lesson 6 of 9
IR35 and employment status
Same work, same client, same invoice. One word decides whether you keep a third more of it.
The short answer
- ✓ IR35 asks whether the relationship would look like employment without the company
- ✓ Control and genuine substitution carry the most weight
- ✓ Medium and large clients determine status and must give reasons
- ✓ Status is per engagement, and working practices outweigh contract wording
What IR35 asks
If the company were removed from the picture, would the relationship between you and the client look like employment? If yes, you are "inside IR35" and the tax advantages of working through a company largely disappear.
The main tests
| Factor | Points towards employment | Points towards self-employment |
|---|---|---|
| Control | Client directs how you work | You decide how to deliver |
| Substitution | You must do it personally | You can genuinely send someone else |
| Mutuality of obligation | Ongoing expectation of work offered and accepted | Engagement by engagement |
| Integration | Line management, staff perks, internal role | Clearly an external supplier |
| Financial risk | Paid regardless | Fixed price, you bear overruns |
| Equipment | Client provides everything | You use your own |
No single factor decides it. Substitution and control carry the most weight, and a substitution clause that could never be used in practice is given little value.
Who decides
| Client type | Who determines status |
|---|---|
| Public sector | The client |
| Medium and large private sector | The client |
| Small private sector clients | Your own company |
Where the client decides, they must give you a Status Determination Statement with reasons, and you can dispute it through their process.
What happens inside IR35
The fee is largely treated as employment income. Income tax and National Insurance apply broadly as they would to a salary, the dividend route is no longer available for that income, and the usual company expense deductions are heavily restricted.
The company still exists and still files, but for that engagement it stops delivering a tax advantage.
The bit HMRC does not spell out
Status is determined per engagement, not per person or per company. You can be inside IR35 for one client and outside for another at the same time, and the same contract can change status if the working practices change.
The written contract matters less than what actually happens day to day. A contract with a substitution clause you would never be allowed to use, for a client who manages you like staff, will not hold up. Keep evidence of the real working arrangement, not just the paperwork.
Common mistakes
- Relying on contract wording alone. Working practices decide it.
- Assuming status applies to you as a person. It is per engagement.
- Accepting a determination without reviewing it. There is a dispute process.
- Ignoring drift. A long engagement can slide into looking like employment.
Try it on your own numbers
This is the same calculator as the full tool page, using 2026/27 rates.
IR35 status check
Tick what is true about how you actually work for this contract. Your likely status updates live. Key tests are flagged.
Indicative only - not a formal determination. For certainty use HMRC's CEST tool or take professional advice.
Likely IR35 status
Key tests pointing inside
All three key tests point outside IR35.
Inside vs outside take-home
Estimate what the same contract leaves you with as an inside-IR35 (PAYE) worker versus running your own limited company outside IR35.
Pension, accountancy, equipment etc. deducted from company profit before Corporation Tax.
Estimate only. Outside-IR35 figures assume a single-director limited company taking a low salary plus dividends. Excludes VAT, Employment Allowance, employer pension nuance and student loans. Not advice - confirm status with HMRC CEST.
Annual contract value
/day × days
Inside IR35
take-home
keep
Outside IR35
take-home
keep
Outside IR35 is worth
more per year - a month
- Inside IR35 (PAYE)
- Income Tax
- −
- Employee NI
- −
- Take-home
- Outside IR35 (Ltd)
- Corporation Tax
- −
- Income Tax + NI on salary
- −
- Dividend tax
- −
- Take-home
Take-home across day rates
Annual take-home at billed days, as the day rate rises from £100 to £1,200.
What this means for you
Do this next, in order
Estimates only - not financial or tax advice. Confirm figures on GOV.UK or with an adviser.
Compare saved scenarios
| Scenario | Inside | Outside | Difference | |
|---|---|---|---|---|
Related calculators
Salary vs dividend
Optimise director pay
Take-home pay
PAYE net pay
Corporation Tax
Company profit tax
Not sure which calculator you need? Browse all calculators or read our guides.
Key takeaways
- ✓ IR35 asks whether the relationship would look like employment without the company
- ✓ Control and genuine substitution carry the most weight
- ✓ Medium and large clients determine status and must give reasons
- ✓ Status is per engagement, and working practices outweigh contract wording
Check you have got it
3 quick questions. No score is kept, and you can change your mind.
1. Who determines IR35 status for a large private sector client?
2. Your contract has a substitution clause but the client would never accept a substitute. How much weight does it carry?
3. Can you be inside IR35 for one client and outside for another?
Sources
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