IR35 might sound like something from Star Wars, but it’s actually a set of tax rules that can have a big impact on how you or the people you hire, get paid.
Here’s a no-nonsense breakdown of what it is, who it affects, and what’s changed this year.
What Is IR35?
IR35 (also called the off-payroll working rules) is there to stop “disguised employment.” That’s when someone works like an employee but uses a limited company (often called a PSC – Personal Service Company) to pay less tax.
If HMRC thinks a contractor should be treated as an employee for tax, IR35 kicks in – and the taxman wants PAYE and National Insurance, just like any regular job.
Who Needs to Worry About IR35?
You need to be aware of IR35 if you are:
- A contractor working through your own limited company
- A business that hires contractors
- An agency that supplies contractors
What Changed in April 2025?
This year, the government updated the thresholds that decide if a business is “small” or not.
Why does that matter? Because only small businesses don’t have to decide a contractor’s IR35 status – the contractor does it themselves.
Here are the new thresholds (you must meet at least two to be considered small):
- Turnover of £15 million or less
- Balance sheet total of £7.5 million or less
- 50 employees or fewer (this one hasn’t changed)
If your business is no longer “medium” or “large,” you might pass the IR35 buck back to the contractor.
IR35 Status: Who Decides?
- If you’re hiring contractors and you’re medium or large: you must check if IR35 applies and deduct tax if needed.
- If you’re hiring as a small business: the contractor decides and deals with the tax.
- In the public sector? Doesn’t matter your size – you still have to decide.
What Does HMRC Look At?
IR35 isn’t just about the contract. HMRC looks at how things actually work in real life.
Key factors include:
- Control: Who’s calling the shots?
- Substitution: Can someone else do the work?
- Mutuality of Obligation: Is there a back-and-forth expectation of work?
- Financial risk: Are you risking your own money?
- Equipment: Whose tools are being used?
- How you’re paid: Salary style or per project?
- Multiple clients: One client or a portfolio?
It’s not one factor alone, it’s the full picture that matters.
What If You Get IR35 Wrong?
If HMRC says your contract was “inside IR35” and you didn’t pay the right tax:
- You could owe backdated tax, interest, and penalties
- If you’re a business, you might face employer’s NIC bills
- And if you didn’t take “reasonable care,” the penalties go up
What About the CEST Tool?
HMRC offers a free tool called CEST to check employment status for tax. It’s a useful starting point – but not the full answer. It’s been criticised for skipping key parts of the test, so don’t rely on it alone. If in doubt, get proper advice.
Whether you’re a contractor, agency, or a business hiring freelance help, IR35 isn’t going away. With the 2025 threshold changes, now’s the time to double-check your status and your responsibilities.
At AD Accountancy, we’re here to make it simple. We help contractors stay on the right side of the tax rules, and we help businesses manage the risk that comes with hiring off-payroll workers.
Need advice or want us to review your contracts? Drop us a line. No jargon. No faff. Just straight answers.
