If you contract through your own limited company — a personal service company, or PSC — IR35 is probably the single most confusing part of how you're taxed. The terminology doesn't help: “inside,” “outside,” “deemed employment.” None of it is self-explanatory. So here's the plain-English version of what it actually means and why it matters.
What IR35 is trying to work out
IR35 exists to answer one underlying question: if you weren't working through a limited company, would this arrangement actually look like employment? HMRC's concern is contractors who, in practice, work like an employee of the client — same hours, same supervision, same integration into the team, no real ability to send someone else to do the work — but who take income as dividends through a company instead of as salary, which historically meant paying less tax and National Insurance than an equivalent employee would.
IR35 is the rule that tries to catch that gap and tax the engagement more like employment where it genuinely resembles one.
Inside vs outside, in plain terms
“Outside IR35” means the engagement looks genuinely like a business-to-business relationship — you control how the work gets done, you carry some genuine business risk, there's no real supervision or control in the way an employee would experience it, and in principle you could send a substitute to do the work instead of you personally. Tax is broadly handled through your company in the normal way.
“Inside IR35” means the engagement looks more like disguised employment, whatever it's called on paper. In that case, Income Tax and National Insurance are deducted at source on the fees for that engagement, broadly as if you were an employee of the client, even though you're still operating through your own company for other purposes.
Why it matters for take-home pay
The status genuinely changes what ends up in your pocket. An engagement that's inside IR35 is taxed closer to employment income, generally leaving less after tax than the equivalent fee taken as dividends from an outside-IR35 engagement. This is exactly why status isn't a technicality — it has a direct, material effect on what a contract is actually worth to you.
Who decides your status
For engagements with medium and large private sector clients, and with the public sector, it's the client who's responsible for assessing your status and telling you the result — you'll usually see this as a status determination statement. For smaller private sector clients, the responsibility for assessing status generally still sits with your own company. Either way, it's not simply a case of choosing whichever answer suits you best — the assessment has to reflect how the engagement actually works day to day, not just what the contract says on paper.
Why this became such a bigger deal
IR35 itself isn't new, but responsibility for assessing it shifted significantly over recent years — moving from the contractor's own company to the end client for medium and large organisations. That change made a lot of businesses far more cautious about how they engage contractors, because the risk of getting a status determination wrong now sits with them in many cases, not just with you. It's part of why some clients became more conservative about offering outside-IR35 engagements even where the working arrangement would genuinely support one — which is frustrating for contractors, but understanding why it happened helps make sense of the market you're contracting into.
What “compliant” actually looks like day to day
Being IR35-compliant isn't a one-off tick-box exercise. It means the working practices genuinely match the status you're claiming — if you're operating outside IR35, that needs to be reflected in how the engagement actually runs, not just in the wording of the contract. It also means keeping proper records: the contract itself, any status determination, and evidence of how the working relationship actually functions, in case it's ever questioned. Getting this wrong isn't just a paperwork issue — it can mean an unexpected tax bill landing well after the work's been done and the money spent.
This is exactly the kind of thing we help PSC contractors get right — staying compliant, understanding what each engagement's status actually means for you, and extracting income in a way that's both correct and tax-efficient rather than guessing. If IR35 is something you're currently navigating without much support, our small business accounting page is a good starting point, or get in touch and we'll talk through your specific contracts.