If you hire contractors or work through your own limited company, it's crucial to understand what off-payroll working is and how it could affect your responsibilities. The phrase off-payroll working refers to UK tax legislation, commonly known as IR35. This determines how contractors should be taxed, whether they're truly self-employed or effectively working as employees.
Getting it wrong can lead to unexpected tax penalties. So, if you're a UK business working with freelancers or intermediaries, staying on the right side of the rules is vital!
Let's break down the off-payroll working rules and explore what they mean for your business.
What Is Off-Payroll Working, and Why Do The Rules Exist?
Off-payroll working refers to situations where individuals, often referred to as contractors, deliver work for a business through their own limited company or another intermediary rather than being hired as employees.
The off-payroll working rules were introduced to ensure that those who work like employees still pay roughly the same Income Tax and National Insurance as employees would. This step helps prevent what's known as “disguised employment”, where someone is technically self-employed but effectively working in the same way as a full-time staff member.
In short, it's about making sure that tax is paid fairly, regardless of how someone is engaged.
Who is Affected?
Off-payroll rules apply when:
- A worker provides services via their own intermediary, often a Personal Service Company (PSC).
- A client engages someone in this way.
- An agency or intermediary is part of the supply chain
If you're a contractor working via a PSC or similar, this applies. And if you're a business hiring external contractors in this way, you definitely need to be aware of these regulations.
Who Is Responsible? Public vs Private Sector
Responsibility for applying off-payroll working rules depends on both the sector you're in and the size of your organisation.
In the public sector, end clients have been responsible for determining a contractor's employment status since 2017. These same rules were extended to the private sector in 2021, but only for medium and large businesses. Your business falls into this category if it has two of the following:
- an annual turnover of more than £15 million
- a balance sheet total of more than £7.5 million
- more than 50 employees
If you run a small, private-sector business, it is exempt from these responsibilities. In these cases, it's the contractor's intermediary (usually a limited company) that remains responsible for determining status and handling any tax liabilities.
What Action Do I Need to Take?
If your business is responsible for determining off-payroll status, you must assess each contractor's engagement and decide whether the rules apply. This process can be completed via the online Check Employment Status for Tax (CEST) tool. You will then need to provide a Status Determination Statement (SDS) explaining your decision.
When the contract falls inside IR35, as the deemed employer, you will need to deduct Income Tax and employee NI. Your business will also be responsible for paying employer's NI contributions (and Apprenticeship Levy, if applicable).
For contracts assessed to be outside IR35, you will not need to make any deductions, and the PSC must handle its own tax affairs.
5 Practical Tips for Dealing with the Off-Payroll Working Rules
To help you stay on the right side of the rules, here are some practical steps businesses can take when working with contractors:
- Use HMRC's tools: Have robust systems in place to run CEST for every contractor.
- Keep records: Save your SDSs, the CEST outputs, and working practice notes, which will be essential during HMRC enquiries.
- Plan ahead: When working with PSCs, ensure tax considerations are clear in proposals and fee negotiations.
- Communicate clearly: Let contractors know their status and be transparent about your reasoning to reduce disputes.
- Stay updated: New guidance has been introduced as recently as May 2025 (including the rise in thresholds for small business exemptions and the avoidance of double taxation if IR35 is wrongly classified), so it's essential to ensure your business stays up-to-date.
Final Thoughts
So, “What is Off-Payroll Working?" In short, it's a set of UK tax rules designed to ensure fairness in how contractors are taxed. If you're a business engaging contractors via PSCs, it's crucial to determine employment status correctly, follow the rules on deductions, and manage compliance diligently.
Navigating off-payroll work can be tricky. If you're uncertain about your obligations or the assessments, our experienced team of accountants are here to help. Please take a look at our Tax Advice Services or get in touch with our team. It's always better to get assessments right up front than face costly corrections later!