What Is an Off Payroll Worker?

Off-payroll working occurs when an individual provides services through an intermediary. This intermediary is typically a limited company or a Personal Service Company (PSC). The individual is not a direct employee of the client.

This structure relates to IR35 tax legislation. These rules prevent “disguised employment.” Disguised employment occurs when workers operate through a company but function as employees. This practice can result in the avoidance of Income Tax and National Insurance Contributions (NICs).

This guide covers:

• The definition of an off-payroll worker.
• Tax treatment under IR35 rules.
• Responsibility for status determinations.
• The differences between “Inside IR35” and “Outside IR35.”
• Common mistakes and examples.

What Is an Off-Payroll Worker?

An off-payroll worker provides services to a client via an intermediary. They are not employed directly. Typically, the worker:

• Operates through a Personal Service Company (PSC) or limited company.
• Submits invoices for payment instead of receiving a payroll salary.
• Signs a contract between the client and the intermediary, not with the individual.

Common Intermediaries

Intermediary Type	Description
Limited Company	A registered company set up at Companies House.
PSC	A limited company where the worker is the sole director and shareholder.
Partnership	A business where two or more individuals share ownership.
Umbrella Company	A company that employs contractors and manages their PAYE.
Agency Worker	A worker engaged via a recruitment agency who may be paid via PAYE or an umbrella.

What Are the Off-Payroll Working Rules (IR35)?

IR35 is the colloquial name for the Intermediaries Legislation. It ensures that individuals who work like employees—but use an intermediary—pay broadly the same tax and NICs as direct employees.

Purpose of the Rules

The rules close the “disguised employment” loophole. Without IR35, a worker could:

• Receive gross fees into a PSC without tax deductions.
• Pay themselves a small salary and take the rest as dividends (avoiding National Insurance).
• Allow the client to avoid 15% Employer NICs and the Apprenticeship Levy.

2026 Enforcement Context

As of April 6, 2026, Joint and Several Liability (JSL) rules apply. If an umbrella company fails to pay the correct tax, the liability can move up the chain to the recruitment agency and eventually the end-client. HMRC can now pursue the agency or client for the unpaid tax if the intermediary fails.

Who Is Affected?

Four parties participate in an off-payroll arrangement:

• The Worker: Provides the skills/services. They bear the risk if the client is a “small business” and the assessment is wrong.
• The Client: Receives the services. Medium and large clients must determine the status and take “reasonable care.“
• The Intermediary: The entity (usually a PSC) between the worker and the client.
• The Recruitment Agency: Often acts as the fee-payer and holds significant liability under JSL rules for ensuring supply chain compliance.

How Off-Payroll Working Works

• Step 1: Engagement: A business-to-business contract is signed between the client (or agency) and the PSC.
• Step 2: Status Assessment: The relationship is evaluated based on Control, Substitution, and Mutuality of Obligation (MOO). Assessments should be documented and retained for 6 years.
• Step 3: IR35 Determination: The role is classified as Inside (deemed employee) or Outside (self-employed).
• Step 4: Payment: For “Inside” roles, the fee-payer deducts tax via PAYE Online. For “Outside” roles, the PSC receives gross payment.

Inside IR35 vs. Outside IR35

Feature	Inside IR35 (Deemed Employee)	Outside IR35 (Self-Employed)
Tax Treatment	Deducted via PAYE.	Paid via Self-Assessment.
Net Pay	Similar to standard payroll.	Managed via Salary and Dividends.
Rights	No holiday pay (Tax only).	No statutory rights.
Responsibility	Fee-payer handles tax.	Contractor handles Corporation Tax.
Expenses	Section 336 rules (Very limited).	Business expenses are claimable.

Who Determines Off-Payroll Status?

Medium and Large Businesses

Clients must issue a Status Determination Statement (SDS) if they meet two or more criteria under the Companies Act 2006:

• Turnover exceeds £10.2 million.
• Balance sheet total exceeds £5.1 million.
• More than 50 employees.

Small Businesses

If the client meets two or fewer of the criteria, the Contractor remains responsible under the Intermediaries Legislation 2000.

Analysis of Common IR35 Mistakes

• Contract-Only Focus: HMRC prioritizes “substance over form.”
• Ignoring MOO: Based on Ready Mixed Concrete case law, an obligation to work suggests an “Inside” status.
• Integration: Being “part and parcel” of the client’s organization is a high-risk factor.
• Lack of Financial Risk: Independent businesses carry Professional Indemnity Insurance and bear the cost of fixing errors.
• Failure to Review: Status should be regularly checked using the CEST tool.

Summary

Off-payroll workers use intermediaries like PSCs. IR35 rules determine if they are taxed as employees (Inside) or businesses (Outside). Medium/large clients (above £10.2m turnover) must provide an SDS, while small clients leave the decision to the contractor.

Frequently Asked Questions
Is an off-payroll worker self-employed?

They are directors of their own company. They are sole traders for tax purposes only if Outside IR35.

Do off-payroll workers pay PAYE tax?

Only if the role is “Inside IR35.” The fee-payer deducts it before payment.

What is the Fair Work Agency (FWA)?

Launched in 2026, the FWA is the body overseeing Employment Standards.

What is a Personal Service Company (PSC)?

A PSC is a limited company typically with the contractor as the sole director.

Can I be inside and outside IR35 at the same time?

Yes, but on different contracts. Status is determined per engagement.

What happens if HMRC investigates?

HMRC will review the working practices. If non-compliant, you may owe back-taxes and penalties.

Do I need IR35 insurance?

Many contractors carry Tax Enquiry Insurance to cover the cost of legal representation.

Can I operate through a PSC on a Skilled Worker Visa?

Restrictive. Check Home Office Immigration Rules.

Glossary of Key Terms

Term	Definition
Apprenticeship Levy	A tax on large employers to fund Apprenticeships.
CEST	HMRC’s Check Employment Status for Tax tool.
Control	A primary status test evaluating authority over methods and hours.
Deemed Employee	The legal status of a worker who is “Inside IR35” for tax.
Dividends	Payments from PSC profits to shareholders.
Fee-Payer	The entity paying the PSC.
Financial Risk	Assessing if the contractor bears commercial risk.
FWA	The Fair Work Agency, established in 2026.
Intermediary	The vehicle through which services are provided, usually a PSC.
IR35 Insurance	Insurance covering HMRC investigation costs.
JSL	Joint and Several Liability, a 2026 rule.
MOO	Mutuality of Obligation, an IR35 pillar.
PSC	Personal Service Company.
Right of Substitution	The ability to send a replacement.
SDS	Status Determination Statement.
Supply Chain Liability	Risk passed up under JSL rules.
Umbrella Company	An intermediary that employs workers directly.