The IR35 Question to Ask Before You Even Price Up a Limited Company
I was three days from incorporating when I looked up my main client’s accounts at Companies House. Company name picked out, formation agent shortlisted, accountancy quote in hand. Then I checked the client’s size, and the entire plan changed.
That check is the one most sole traders never make before going limited. It should be the first thing you do, not a detail you discover afterwards. Here’s why.
What IR35 actually is, in plain English
IR35 is the informal name for the Intermediaries Legislation, introduced in the Finance Act 2000. It exists to catch one specific arrangement: someone who is, in substance, an employee of their client, but who bills through their own limited company in order to pay Corporation Tax and dividend tax instead of income tax and National Insurance.
The test, stripped of jargon: if you removed the company from the picture, would this working relationship look like employment? If yes, the contract is inside IR35 and the income from it is taxed as employment income. If no, it’s outside, and the normal limited company tax treatment applies.
Notice what this means for the incorporation decision. The entire tax advantage of a limited company runs through the salary-dividend combination, which depends on your income arriving as company profit available for dividend payment. Income from an inside-IR35 contract is taxed before it ever reaches that stage. The dividend route isn’t less efficient for that income. It’s unavailable.
Who decides your status, and why client size is the first question
Since April 2021, if your client is a medium or large private sector organisation, they assess your IR35 status, not you. They issue a Status Determination Statement, and if their determination is inside IR35, tax and National Insurance are deducted at employment rates before the money reaches your company. You can ask them to reconsider. Until they do, their determination stands, however you might assess yourself.
A client counts as small, meaning you keep responsibility for your own assessment, if it meets at least two of three conditions: annual turnover below £15 million, balance sheet total below £7.5 million, and fewer than 50 employees. Those first two thresholds rose in April 2025, from £10.2 million and £5.1 million, so more clients qualify as small now than did a year ago. If you received a determination from a client sitting near the old thresholds, it’s worth checking whether they still qualify as medium or large.
The practical step: search your client at Companies House, read the filed accounts, and check the turnover, balance sheet, and headcount against those thresholds. If your client is part of a group, the group’s figures are what count. Twenty minutes of reading can reshape a decision worth thousands of pounds a year.
What being inside IR35 does to the maths
Under 2025/26 rates, the gross tax comparison between sole trader and limited company is already unflattering: at £40,000, £50,000, £70,000, and £80,000 of profit, the limited company costs more in tax, and at £60,000 it saves a gross £500 that doesn’t survive a realistic accountancy fee.
Inside IR35 makes this simpler and worse. Your company receives income that has already been taxed at employment rates, which is broadly equivalent, after tax, to what you’d have taken home as a sole trader. But the company still files annual accounts, still submits a Corporation Tax return, still runs payroll with Real Time Information submissions, and still pays its accountant. The saving doesn’t shrink. It becomes zero, and the accountancy cost remains in full.
The net position, when your income is fully inside IR35, is a cost of approximately £1,500 to £2,500 a year, at every income band from £40,000 to £80,000. That range is simply the accountancy premium with nothing left to offset it. You would be running a limited company at full administrative cost while receiving employment-taxed income.
The three tests, if the assessment is yours
If your clients are small, you assess your own status, and three factors carry the most weight. Substitution: could you genuinely send a qualified replacement, and would the client actually accept one? The contract clause matters far less than the honest answer. Control: does the client direct how, when, and where you work, or do they only care what you deliver? Mutuality of obligation: is the relationship a series of discrete projects with genuine gaps, or continuous work flowing for years without a break?
HMRC’s CEST tool will give you an indicative determination, and HMRC has committed to standing behind accurate, good-faith results. Use it honestly. If it returns “unable to determine”, treat that as what it is: a signal that you need advice, not an answer.
Ask this question first
If most of your income comes from one medium or large client and the honest picture is plausibly inside IR35, you don’t need the rest of the calculation. The answer to “should I go limited?” is no at £40,000, and it’s still no at £80,000. If your income is mixed, run the comparison on the outside-IR35 portion only, and check whether the saving on that slice alone covers the full cost of the structure. In most cases where more than half your income is inside, it won’t.
My near-miss taught me that IR35 is where you start the incorporation assessment, not where you finish it. Check your client’s size this week. It’s the cheapest piece of tax planning you will ever do.
IR35 gets a full chapter in my book “Your Number: The UK Freelancer’s Exact Guide to Knowing When Going Limited Actually Pays Off”, alongside the complete tax comparison at five income bands from £40,000 to £80,000. You’ll find it at www.amazon.com.
About the author: Kate Perrin is an ACA-qualified chartered accountant who spent four years in practice in Bristol before more than a decade as a sole trader, advising creative and independent businesses on their numbers. She writes about UK tax structure decisions for freelancers and independent professionals.