For UK contractors and freelancers, working through your own limited company — a “personal service company” (PSC) — remains the most flexible and tax-efficient option. The catch is IR35, the off-payroll working rules designed to stop “disguised employees” getting a tax advantage. Whether a contract is “inside” or “outside” IR35 changes your tax bill significantly. This guide explains how it works and how genuine contractors stay on the right side of it.
Contractor & IR35 Key Facts 2026
- PSC: a limited company you own and provide your services through
- Outside IR35: genuine business — salary + dividends, more take-home
- Inside IR35: taxed broadly like an employee on that engagement
- Public/large private clients: the client decides your status
- Small private clients: the contractor's company decides
- Key tests: substitution, control, mutuality of obligation
Why contractors use a limited company
A limited company separates you from your business, looks more credible to agencies and clients, and — when you are outside IR35 — lets you extract profit tax-efficiently through a small salary plus dividends. You can also claim legitimate business expenses and control when you take income across tax years. For most professional contractors it beats operating as a sole trader or through an umbrella company.
What IR35 actually tests
IR35 asks a simple question: if you stripped away your company, would the relationship look like employment? If yes, you are “inside IR35” and should be taxed like an employee. Three tests dominate: substitution (can you send someone else to do the work?), control (does the client direct how, when and where you work?), and mutuality of obligation (must they offer work and must you accept it?).
A genuine contractor with a right of substitution, control over their work, project-based engagements and their own equipment points to “outside”.
Who decides your status?
Since the 2021 reforms, for engagements with public sector bodies and medium or large private clients, the client (the end hirer) determines your IR35 status and issues a Status Determination Statement. If they judge you inside, the fee payer deducts tax and NIC before paying your company.
For small private-sector clients (broadly under two of: £10.2m turnover, £5.1m balance sheet, 50 employees), the old rules still apply — your own company assesses and bears the risk of the determination.
Inside vs outside: the tax difference
Outside IR35: your company invoices, pays a small salary, retains profit and pays corporation tax, and you draw dividends — the classic efficient mix. Inside IR35: most of the fee is treated as a “deemed employment payment”, taxed through PAYE with income tax and NIC, leaving little advantage over employment. Getting the status wrong and being caught means back taxes, interest and penalties.
Staying compliant
Keep contracts and working practices aligned — a great contract means nothing if you work like an employee. Retain evidence of substitution rights, multiple clients, your own tools, and control over your work. Consider a professional IR35 status review and appropriate insurance. Review each engagement separately: you can be outside on one contract and inside on another at the same time.
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View company packagesFAQ
What is a personal service company?
A personal service company (PSC) is a limited company through which a contractor or freelancer provides their services to clients, usually owning and directing it themselves. It is the standard, tax-efficient structure for professional contracting, subject to the IR35 rules.
What is the difference between inside and outside IR35?
Outside IR35 means you are a genuine business and can take a small salary plus dividends, keeping more of your fee. Inside IR35 means the engagement is treated like employment, with income tax and NIC deducted, removing most of the tax advantage of using a company.
Who decides my IR35 status?
For public sector and medium/large private sector clients, the client decides and issues a Status Determination Statement. For small private sector clients, your own company assesses the status and carries the risk, under the original IR35 rules.
What are the main IR35 tests?
The key tests are substitution (whether you can send a substitute), control (whether the client dictates how, when and where you work) and mutuality of obligation (whether the client must offer work and you must accept it). Genuine contractors point toward being outside IR35.
Can I be inside IR35 on one contract and outside on another?
Yes. IR35 is assessed contract by contract based on the actual working relationship. You can hold one engagement that is outside IR35 and another that is inside at the same time, so each contract should be reviewed separately.