IR35 essentials matter more than ever in the 2025/26 tax year. The rules – also called the off‑payroll working rules – determine whether earnings taken through a personal service company (PSC) should, in fact, be treated as employment income. Getting the decision wrong can expose both contractors and clients to unexpected income tax, national insurance contributions (NICs) and interest.
The Office for Budget Responsibility (OBR) forecasts that 3.7m more people will fall into income tax by 2028/29 because frozen thresholds are drawing additional workers into higher‑rate bands (OBR, 2024). Many of the newcomers are freelancers or consultants offering specialist skills on a project basis, so misclassifications under IR35 could rise. At the same time, HMRC puts the overall tax gap at 4.8 % (£39.8bn) for 2022/23 and is investing heavily in compliance campaigns (HMRC, 2024). The department has confirmed it reviews every off‑payroll engagement it enters itself – 766 in 2023/24 – signalling how closely it looks at everyone else (HMRC, 2024).
If you are among the 4.236m self‑employed workers recorded in June 2025 (ONS, 2025) or you engage contractors, understanding IR35 essentials is no longer optional. Below we explain what the rules are, where the main risks sit and how we help clients stay compliant.
What IR35 covers and why it matters
IR35 applies when a worker supplies services through an intermediary – most commonly a PSC – but would be an employee if they worked directly for the end‑client. When IR35 “catches” an engagement, the worker’s fees are treated as salary subject to PAYE and employer NICs.
Since April 2021 in the private sector and April 2017 in the public sector, medium and large clients (companies with two of: turnover over £10.2 m, balance sheet over £5.1 m and 50+ employees) must decide the status and operate PAYE where IR35 applies. Small clients leave the decision – and the risk – with the contractor.
Financial exposure can be sizeable: HMRC can assess unpaid tax/NICs for up to six years, plus interest and penalties. That is why IR35 essentials should sit high on finance and cashflow risk registers.
IR35: Key tests HMRC applies
HMRC uses three core tests when challenging status.
- Control: Who decides how, when and where the work is done? Greater client control points to employment.
- Substitution: Can the contractor send a suitably qualified replacement without permission? Genuine substitution supports self‑employment.
- Mutuality of obligation: Is the client obliged to offer work and the worker obliged to accept it? Mutual ongoing obligation leans towards employment.
No single test is decisive. HMRC weighs the whole picture, including written contracts and day‑to‑day behaviour.
Common risk areas we see
Client‑side reviews frequently reveal the following.
- Statements of work that look airtight, but day‑to‑day control sits with the line manager.
- Substitution clauses that require prior approval, effectively blocking real substitution.
- Rolling three‑month contracts renewed for years without retender.
- Contractors given staff perks such as laptops, parking or paid training.
Each factor weakens an outside‑IR35 position.
Practical steps for freelancers
- Status review: Use HMRC’s CEST tool, but also seek a second opinion – it is only as good as the inputs.
- Evidence pack: Keep diaries, project plans and emails showing autonomous working and, if possible, any instances of real substitution.
- Contract terms: Make sure the written agreement matches reality; remove clauses on line management, appraisal or paid leave.
- Insurance: Consider professional IR35 insurance to cover possible liabilities.
Practical steps for employers
- On‑boarding process: Build an IR35 status assessment into procurement or HR workflows.
- Governance: Conduct quarterly reviews – sample engagements and check that working practices still match the assessment.
- Record-keeping: Retain evidence behind every decision, plus reasons when the assessment changes.
- Budgeting: Factor employer NICs and apprenticeship levy into project costs where engagements fall inside IR35.
Next steps for secure compliance
IR35 should not be a source of sleepless nights. Whether you write code from your kitchen table or hire a team of contractors to deliver mission‑critical projects, a structured approach will keep surprises to a minimum. Begin with a clear status determination, document the reasoning and revisit it whenever working arrangements shift. If anything feels uncertain, ask – the cost of early advice is far lower than a retrospective HMRC assessment stretching back six years. Our specialists combine technical insight with practical, jargon‑free support, giving you confidence that contracts, working practices and payroll align.
Ready to take the next step? Contact us for a free initial discussion about your IR35 position.