IR35 Off-Payroll Working 2026/27 — Status Tests & CEST

IR35 is the set of rules used to assess whether a worker providing services through an intermediary would have been an employee if engaged directly. For 2026/27, the public sector and medium or large private/voluntary-sector client generally decides the status of each engagement and passes a Status Determination Statement (SDS) through the labour chain. If the rules apply, the deemed employer deducts PAYE and employee NI and pays employer NI; employer NI is not deducted from the deemed direct payment itself. Small private-sector clients have a different allocation of responsibility. There is no fixed take-home percentage gap: the result depends on contract value, expenses, pension, tax code, extraction and client structure. Assess the engagement with the Salary Calculator→ and read the Self-Employed vs Limited Company guide for company-side context.

The starting question is whether you would be an employee of the client if engaged directly. Status is decided from the contract and actual working practices, considering the whole relationship rather than one label or clause. Control, personal service/substitution, mutuality, financial risk and integration can all be relevant; no single factor guarantees an inside or outside result.

Inside IR35 — How the Tax Works

When an engagement is inside the off-payroll rules, the deemed employer calculates the deemed direct payment and deducts PAYE and employee NI from the payment to the intermediary. Employer NI and, where applicable, Apprenticeship Levy are paid on top and cannot be deducted from the deemed direct payment. The calculation can involve VAT, materials, allowable expenses, pension contributions and payments already made, so a £100,000 contract cannot be converted into one universal take-home figure. The worker may have a tax code and Personal Allowance position through PAYE; it is not correct to assume that the allowance is unavailable simply because a company is in the chain.

Outside IR35 — The Company Route

Outside IR35, the contractor's limited company normally receives the contract income, pays corporation tax on taxable profits and may distribute profits as salary and dividends. Dividends do not attract employee NI, but they use the £500 dividend allowance and 2026/27 rates above the allowance are 10.75%, 35.75% and 39.35%. Corporation tax is generally 19% for profits up to £50,000, 25% above £250,000, with marginal relief between those limits, subject to associated-company and other rules. The outcome depends on salary, expenses, pension contributions, extraction timing and the company's facts; outside IR35 is not an automatic take-home advantage.

How the Deemed Payment Is Calculated

For an inside-IR35 engagement, the deemed employer follows the statutory calculation rather than applying a single percentage. It starts with the payment to the intermediary, removes VAT and direct material costs, and deducts qualifying expenses; the deemed direct payment is then subject to PAYE and employee NI. Employer NI is calculated and paid separately. The £100,000 available to the supply chain is therefore not the same as a £100,000 salary, and the result depends on the fee arrangement, tax code, pension and other deductions. A payroll calculation is needed before quoting a take-home figure.

The Status Tests

HMRC and clients use four main tests, considered together — no single factor decides the outcome:

• Control — if the client decides your hours, location and how the work is done, that points to employment. A genuine contractor decides the method and schedule.
• Substitution — can you send a suitably qualified substitute? A real right of substitution (not just a token clause) points outside IR35; personal service points inside.
• Financial risk — do you risk loss, carry rectification costs, or manage your own equipment and insurance? Employees bear no financial risk.
• Part and parcel — are you integrated into the business, attending meetings, using its systems and treated like staff? Integration points inside.

The contract is the starting point, but HMRC looks at how the work is actually done — the working practices override a written substitution clause that nobody ever uses. That is why an annual review of live contracts matters more than the wording on day one.

CEST and Status Determination Statements

HMRC's Check Employment Status for Tax (CEST) tool gives a view based on the answers entered, and HMRC says it will stand by a reasonable CEST result where the information is accurate and the tool applies. Public-sector and medium/large private or voluntary-sector clients normally determine status and must issue an SDS with reasons. A private or voluntary-sector client is generally medium/large if it meets at least 2 of: turnover over £10.2m, balance sheet total over £5.1m, or more than 50 employees; group and simplified-test rules can also matter. A small client does not determine status under the off-payroll process, but the worker's intermediary remains responsible for applying the relevant rules. A worker or deemed employer can disagree in writing, and the client must respond within 45 days.

Worked Example: Why the Gap Is Not Fixed

Take a £100,000 annual contract as an illustration. The inside-IR35 result depends on the payment to the intermediary, VAT, allowable expenses, the fee-payer's payroll, the worker's tax code, pension contributions and the 2026/27 NI thresholds. Outside IR35, the company result depends on corporation tax, salary, employer NI, expenses, pension contributions, dividend allowance, the 10.75%/35.75%/39.35% dividend rates and the director's other income. A £12,570 salary is not automatically free of all company costs: employee NI may be nil at the primary threshold, but employer NI can apply above the £5,000 secondary threshold. The two routes therefore need a tailored payroll and company calculation; “25% better off” is not a safe general conclusion.

Common IR35 Mistakes

• Relying on a substitute clause alone — working practices decide, not the contract wording.
• Ignoring the SDS — if the client says inside, the fee-payer must deduct tax; failing to is the client's problem, but the contractor still feels the deduction.
• Not reviewing live contracts — status can change as the engagement evolves; an annual review catches drift.
• Assuming small-client exemption — check the client's size, group and simplified-test rules; an agency in the chain does not by itself decide the client's size.
• Skipping the 45-day challenge window — a written disagreement must be answered within 45 days.

Action Plan for Contractors

Frequently Asked Questions

Contract review records that support the decision

An IR35 decision is stronger when it explains how the engagement operates in practice. Keep the signed contract, statement of work, amendments, invoices and a short review of the actual working arrangements. Note who decides what work is done, where and when it is done, how substitution would work, who carries financial risk, who supplies equipment, and whether the contractor is integrated into the client's organisation. The record should describe reality, not merely repeat labels such as “consultant” or “business-to-business”.

Review the file when the project changes. A new manager, fixed rota, extended engagement, changed deliverables, altered approval process or removal of substitution rights can affect the status analysis. If several clients use the same company, do not copy one determination across all engagements. Each contract and working practice must be assessed on its own facts.

The fee-payer should retain the SDS chain and evidence of delivery to the worker and intermediary. The worker should request a missing SDS promptly and challenge factual errors in writing. Keep the challenge, response and any revised determination with the payroll records. If the result is inside IR35, reconcile the payslip with the deemed payment and check employer costs; if it is outside, retain company bookkeeping and extraction evidence. Neither outcome removes the need for accurate records.

Contract review records that support the decision

An IR35 decision is stronger when it explains how the engagement operates in practice. Keep the signed contract, statement of work, amendments, invoices and a short review of the actual working arrangements. Note who decides what work is done, where and when it is done, how substitution would work, who carries financial risk, who supplies equipment, and whether the contractor is integrated into the client's organisation. The record should describe reality, not merely repeat labels such as “consultant” or “business-to-business”.

Review the file when the project changes. A new manager, fixed rota, extended engagement, changed deliverables, altered approval process or removal of substitution rights can affect the status analysis. If several clients use the same company, do not copy one determination across all engagements. Each contract and working practice must be assessed on its own facts.

The fee-payer should retain the SDS chain and evidence of delivery to the worker and intermediary. The worker should request a missing SDS promptly and challenge factual errors in writing. Keep the challenge, response and any revised determination with the payroll records. If the result is inside IR35, reconcile the payslip with the deemed payment and check employer costs; if it is outside, retain company bookkeeping and extraction evidence. Neither outcome removes the need for accurate records.

Official sources

• Check employment status for tax
• Off-payroll working through an intermediary
• Employment Status Manual

Model your take-home either way with the Salary Calculator→, then read the Self-Employed vs Limited Company guide and the Dividend Allowance guide for the company-side numbers. Whatever the determination says, keep the paperwork: status decisions, CEST outputs and contract reviews are the first things HMRC asks for if an engagement is ever challenged.

Official sources

• GOV.UK: Off-payroll working for clients
• GOV.UK: Fee-payer responsibilities
• GOV.UK: Calculate the deemed employment payment
• GOV.UK: Check Employment Status for Tax
• GOV.UK: Understanding off-payroll working
• HMRC Employment Status Manual
• GOV.UK: Rates and thresholds for employers 2026 to 2027

These GOV.UK and HMRC pages are the official references for status, client and fee-payer duties, deemed payments and rates. Recheck the engagement facts and current guidance before relying on an IR35 conclusion.