IR35 has loomed over UK contractors for over two decades, and even in 2025, it continues to confuse and frustrate many in the tech space. In this post, we’ll break down how IR35 works, the latest reforms, and what they mean for contractors navigating tech and finance roles in the UK.
A Quick Recap: What Is IR35?
IR35 is a piece of HMRC legislation, also known as the “off-payroll working” rules, that was designed to prevent tax avoidance. It was developed in response to ‘disguised employees’ – someone functioning as an employee but operating via a Limited Company in order to avoid paying more tax.
- If you are inside IR35, this means you are considered equivalent to a permanent employee and will have to pay broadly the same tax and National Insurance Contributions (NIC), typically facing higher PAYE deductions. However, you would not be eligible for the benefits offered to permanent employees.
- If you are outside IR35, this means you are considered to be genuinely self-employed and will be taxed accordingly, for example, through dividends via your limited company, which is generally a more tax-efficient and preferable outcome.
Limited Company vs Umbrella Company
Earlier on, we mentioned something called a limited company. There are two main ways UK contractors get paid: by running their own limited company, or by working through an umbrella company. Here’s how these differ:
Limited Company
Also known as a Personal Service Company (PSC), this is a company you set up and own to provide your services to clients.
- You are the director and shareholder.
- You send invoices to clients or agencies.
- You manage your own tax affairs, usually with an accountant whom you pay.
- You get paid through a mix of salary and dividends, which can be tax-efficient.
Setting up a limited company is best suited for outside IR35 contracts, where you're genuinely self-employed and not treated like an employee.
Umbrella Company
An umbrella company acts as a middleman between you and the end client. You're technically employed by the umbrella.
- You submit timesheets to the umbrella.
- The client pays the agency, the agency pays the umbrella, and the umbrella pays you (after deductions).
- You're paid via PAYE, like a normal employee, with tax, NI, and other costs already deducted.
Umbrella companies are often used for inside IR35 roles or where the client insists on PAYE contracts.
How Do I Know My IR35 Status?
Whether a role falls inside or outside IR35 often depends on who the client is and how large their business is.
If your client is a medium or large business:
The end client is legally responsible for determining your IR35 status.
They must:
- Review the contract and working practices.
- Provide you with a Status Determination Statement (SDS) explaining their decision.
- Take “reasonable care” in making that decision.
This applies to most companies in sectors like finance, tech, healthcare, etc.
If your client is a small business:
You, the contractor, are responsible for deciding whether the contract is inside or outside IR35.
A small company was, until April 2025, defined by HMRC as one that meets at least two of the following:
- Turnover of £10.2 million or less.
- Balance sheet total of £5.1 million or less.
- 50 employees or fewer.
In this case, you'll need to assess the role yourself and may need professional advice or use HMRC’s CEST tool.
IR35 Reforms You Need To Be Aware Of
- There have been some changes to what qualifies a client as a “small company” that took effect from the 6thApril 2025 (beginning of the 2025/26 tax year):
- Turnover limit increased to £15 million.
- Balance sheet total limit increased to £7.5 million.
- Employee headcount limit remains the same at 50.
- Also beginning in April 2025, National Insurance has jumped from 13.8% to 15%, with the NIC threshold dropping from £9,100 to £5,000. This makes contractors more expensive for clients to hire under PAYE, which could increase demand for outside IR35 workers.
- From April 2026, umbrella companies must pay for benefits in kind and face tighter HMRC oversight. These reforms may reduce the net take-home pay of umbrella contractors even further, making limited company arrangements more attractive where compliant.
It’s really important to be aware of your IR35 Status to make sure you are staying compliant.
Getting it wrong, whether you or the client is responsible, can lead to large tax bills, penalties, and interest. That’s why many contractors prefer to work with clients who give clear and fair IR35 decisions upfront.
How the Reforms Will Impact UK Contractors
More Outside IR35 Opportunities…
With these changes, contractors may regain autonomy over status determination, especially when working with clients now qualified as small companies. That could lead to more outside IR35 contracts, which generally offer better take-home pay and flexibility.
…But Not Immediately, and Not Everywhere
The reclassification effect is delayed by company reporting cycles. Many contractors could wait until 2026–28 before seeing any change in status liability. Meanwhile, those working with regulated firms, large financial institutions, or group subsidiaries, even if small, will likely remain under client-led IR35 assessments.
Increased Documentation and Compliance Burden
If you're now responsible for your own status determination, you must:
- Maintain clear, written contracts.
- Clarify and document your working relationship (e.g. control, mutuality of obligation, right of substitution).
- Keep records of assessments and tools used (e.g. CEST or professional advice).
These records may be needed if HMRC investigates!
In Summary
IR35 has reshaped the contracting landscape in the UK, especially in fast-moving sectors like tech and finance, where projects are dynamic and flexible working is the norm.
The 2025 and 2026 reforms bring new opportunities for contractors to operate outside IR35, but also greater responsibility for status determination and documentation.
Whether you choose a limited company or umbrella model, staying informed on your IR35 position is critical. The wrong decision can mean lower pay, unexpected tax bills, and compliance headaches.
If you're unsure how the rules affect your contract or how best to structure your working setup, don’t guess. Specialist recruiters and IR35 advisers can help you understand your options and connect you with trusted umbrella providers or accountants.
