IR35, formally the "off-payroll working" rules, is UK tax legislation that stops contractors avoiding employment taxes by working through their own limited company (a personal service company, or PSC) when in practice they behave like an employee of the client.
Each engagement is assessed as either inside IR35 or outside IR35. Inside IR35 means the work is treated like employment: income is taxed through PAYE with Income Tax and employee National Insurance, and the fee-payer also bears employer NIC (15% in 2025/26). Outside IR35 means you run a genuine business and can pay yourself a mix of salary and dividends, taxed at lower dividend rates (8.75% basic, 33.75% higher in 2025/26).
For medium and large clients, the client decides your status; small private-sector clients are exempt and the contractor decides.
Example: On a £60,000 contract, an outside-IR35 contractor might take a small salary plus dividends and keep roughly £46,000. The same contract inside IR35, taxed via PAYE, could leave around £40,000 after Income Tax and NIC, a difference of thousands of pounds.
Estimate the gap with our IR35 calculator, or see related terms like PAYE and dividend tax.