Off-payroll working (IR35) for employers

By PaySlipCheck Editorial · Reviewed by PaySlipCheck Editorial Standards Team · 14 June 2026 · 5 min read

Since April 2021 in the private sector (and 2017 in the public sector), medium/large clients engaging off-payroll workers must determine each contractor's IR35 status. If inside IR35, the fee-payer becomes the deemed employer + must operate PAYE + NI. This guide covers the client's duties: status determination (CEST), Status Determination Statement (SDS), the appeals process, small-company exemption, and penalties for non-compliance.

Verified against 2 official sources · Last reviewed 14 June 2026
On this page
  1. Who's affected
  2. Status determination process
  3. What "inside IR35" means
  4. The fee-payer's PAYE duties
  5. Appeals
  6. Penalties
  7. Small company exemption
  8. In short

Who's affected

  • Medium/large private sector clients (2 of: turnover >£10.2m, balance sheet >£5.1m, >50 employees)
  • All public sector clients
  • Small private sector clients — exempt; contractor's PSC still determines status

Status determination process

  1. Client assesses using CEST (HMRC's Check Employment Status for Tax tool) or another method
  2. Issues Status Determination Statement (SDS) with reasoning
  3. If inside IR35: fee-payer applies PAYE + Class 1 NI
  4. Employer NI at 15% applies on top

What "inside IR35" means

Working practices resemble employment: - Client controls how/when/where work is done - No genuine right of substitution - Mutual obligation (must offer + must accept work)

The fee-payer's PAYE duties

  • Deduct PAYE + NI from contractor invoice
  • Pay employer NI on top (15% above ST)
  • Issue payslip to contractor
  • Submit RTI FPS as if PAYE employee

Appeals

Contractor can dispute SDS via client-led appeals process. Client must respond within 45 days.

Penalties

  • Incorrect status determination without reasonable care: liability transfers to client
  • Failure to issue SDS: penalty + status determination invalid
  • Continued non-compliance: HMRC investigation + backdated tax

Small company exemption

Small clients exempt from off-payroll rules — the contractor's PSC (personal service company) makes the IR35 determination. Same tax outcome if wrong.

In short

Off-payroll rules make client responsible for IR35 status for medium/large clients. Inside IR35 = PAYE + employer NI by fee-payer.

Frequently asked questions

How do I use CEST?

Complete HMRC's online tool answering questions about the engagement. CEST provides a determination; HMRC will stand by determinations made using CEST accurately.

What if a contractor disputes my SDS?

You must operate a client-led disagreement process. Respond within 45 days with reasoned answer. Contractor may then challenge HMRC directly.

Does small-company exemption mean no IR35?

IR35 still applies via the contractor's PSC. The small client is exempt from making the determination — but tax outcome is the same if inside IR35.

Can we blanket-determine all contractors inside IR35?

No — HMRC requires reasonable care per contract. Blanket determinations without individual assessment can transfer liability to the client.

What's the cost impact of putting someone inside IR35?

Contractor day rate becomes gross pay; PAYE + NI deducted; employer NI added on top. Client's cost increases ~15% + contractor take-home falls ~20-30%.

Related calculators

Related guides

  • Inside vs outside IR35 — "Inside IR35" means the contract is treated like employment for
  • Should I start a Ltd? — Whether to start a UK limited company depends on factors well
  • Sole trader vs Ltd — Sole trader is the default UK self-employed structure: no setup,
  • Employer NI — Employer NI = 15% on earnings above £5,000 in 2026/27. Employment Allowance offsets up to £10,500.

More on related topics

  • Employer hiring cost — True employment cost = gross salary + employer NI (15%) + pension (3%) + apprentice levy + benefits + overhead.
  • Attachment of earnings — AEO = court order requiring employer to deduct debt from wages. Protected earnings threshold applies.
  • Auto-enrolment duties — Auto-enrolment = employer duty since 2012. 8% total minimum. Re-enrolment every 3 years.

Related salary breakdowns

Glossary terms used on this page

Quick definitions for the key terms above.

  • PAYE — The UK system through which employers deduct Income Tax and National Insurance from employees' pay before paying it to them.

Sources

All figures on this page are sourced from official UK government publications. We don't cite secondary commentary or other calculator sites.

  1. GOV.UK - Off-payroll working
  2. GOV.UK - National Insurance rates + categories

All tax figures on this page use the same configuration that powers our calculators — see our editorial standards for the review process.

Last reviewed: 14 June 2026. Next review due 14 December 2026.

Disclaimer: This page provides general information based on published HMRC and gov.scot figures. It is not personal tax or financial advice. For your specific situation, please consult a qualified accountant or contact HMRC directly.