What Is IR35? The UK Contractor Tax Trap in 2026

IR35 is the UK tax rule that decides whether a contractor working through a Ltd company is taxed as a normal business (outside IR35) or as a deemed employee on PAYE (inside IR35).

Outside IR35 means you can pay yourself a small salary plus dividends after corporation tax, which is materially more tax-efficient than PAYE on the same revenue.

Since April 2021, the end client (not the contractor) decides status for most private-sector engagements. Get this wrong and the tax bill is retrospective.

The ideal Ltd company setup outside IR35: £12,570 salary, employer pension contributions, legitimate expenses, dividends from the remainder. £500 dividend allowance is small but free.