Off-payroll working rules hub: everything contractors need to know

What the off-payroll working rules are and where they sit in law

The off-payroll working rules are the tax rules that govern how contractors supplying their services through a personal service company (PSC) are taxed when the end client is a medium or large organisation. They sit in Chapter 10 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) and are distinct from the older IR35 rules in Chapter 8 of the same Act. Understanding that distinction matters: Chapter 8 is the self-assessment regime where the PSC decides its own status and pays any tax; Chapter 10 is the off-payroll regime where the end client decides status and the fee-payer (usually an agency) operates PAYE before the money reaches the PSC at all.

In practice, most contractors and advisers use "IR35" to mean both regimes. That is not wrong as a shorthand, but the mechanics are entirely different depending on which chapter applies to your engagement. If you want to understand the three employment-status tests that underpin both chapters (control, substitution, mutuality of obligation), our guide to what IR35 is and how the status tests work covers that in depth. This hub is about the Chapter 10 off-payroll regime specifically: who it applies to, how it works, and what it means for your tax position.

Timeline: how the rules developed

The off-payroll working rules did not arrive all at once. They were introduced in stages and extended over time as the government sought to close what it saw as systematic avoidance in public-sector contracting.

From 6 April 2017, Chapter 10 applied to public-sector clients. Under those rules, public bodies (central government departments, NHS trusts, local authorities, educational institutions, and other public authorities) became responsible for determining whether a contractor was inside IR35 and for operating PAYE and National Insurance accordingly. Before that date, public-sector clients sat under Chapter 8 alongside private-sector clients, meaning the PSC self-assessed. The 2017 change was a significant departure from the pre-existing regime and gave rise to much of the case law and practice that now shapes how large clients approach status determination.

The extension to medium and large private-sector clients was legislated for 6 April 2020 but delayed by one year to 6 April 2021. The delay was granted by the government in March 2020 in response to the COVID-19 pandemic and the resulting economic disruption. The rules came into force for private-sector clients on 6 April 2021 and have applied since then. There were no further delays. If you are engaged by a medium or large private-sector client and that engagement started on or after 6 April 2021, Chapter 10 applies.

The deep guide to who determines status, what the SDS must contain, how PAYE is operated, and how the debt-transfer chain works in the private sector is our dedicated post on off-payroll working rules in the private sector. This hub does not duplicate that detail; instead it gives you the full structural picture and links to the right resources.

Who the rules apply to: the small company exemption

Chapter 10 does not apply to small clients. Where the end client qualifies as small, the engagement stays under Chapter 8 and the PSC continues to self-assess its own IR35 status. This exemption is one of the most practically important features of the regime because it determines who holds the status risk: the client (Chapter 10) or the contractor (Chapter 8).

The small company definition comes from the Companies Act 2006 size test. A company is small if it meets two or more of three conditions. The thresholds changed for financial years beginning on or after 6 April 2025 (the company size threshold uplift made by the Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024, applied to the off-payroll rules for financial years beginning on or after 6 April 2025). The two sets of thresholds are:

Condition	Before 6 April 2025	From 6 April 2025
Annual turnover	Not more than £10.2m	Not more than £15m
Balance sheet total	Not more than £5.1m	Not more than £7.5m
Number of employees	Not more than 50	Not more than 50

A company must meet at least two of the three conditions. Meeting only one is not enough. For example, a company with £12m turnover, £6m balance sheet, and 30 employees meets all three of the 2025 thresholds, so it is small. A company with £20m turnover, £6m balance sheet, and 40 employees meets two conditions (balance sheet and employees) and is also small. A company with £20m turnover, £8m balance sheet, and 45 employees meets only one condition (employees) and is not small.

There is also a qualifying period rule: a company must meet (or cease to meet) the conditions for two consecutive financial years before its size classification changes. A client that was large in its 2023/24 and 2024/25 financial years but fell below the thresholds in 2025/26 is still large for contracting purposes until it has been small for two consecutive years. Do not assume a client has moved out of Chapter 10 scope without written confirmation and evidence from recent filed accounts at Companies House showing two qualifying years.

Contractors working for clients that straddle the threshold change (with financial years spanning April 2025) may find the old thresholds applied for part of their engagement and the new thresholds apply from the client's next qualifying year. Our dedicated post on the IR35 small company exemption sets out the mechanics in full and gives worked examples.

Who decides your status: the Status Determination Statement

Where Chapter 10 applies, the end client is responsible for deciding whether the engagement is inside or outside the off-payroll rules. This decision is communicated in a Status Determination Statement (SDS). The SDS is a legal requirement under Chapter 10: the client must issue it, and it must contain a clear conclusion (inside or outside), the reasons for that conclusion, and a statement that the conclusion was reached with reasonable care.

The SDS must be issued to the contractor (or their PSC) and to the next party in the supply chain (usually the agency acting as fee-payer). If the client fails to pass the SDS down the chain, the liability for PAYE and National Insurance sits with the client rather than the fee-payer until the SDS is properly communicated. Every party in the chain has an obligation to pass the SDS on.

The reasonable care requirement is not a rubber stamp. HMRC expects clients to assess each engagement individually, on its actual facts: the genuine working practices, the degree of control the client exercises, whether there is a meaningful right to send a substitute, and the realistic mutuality of obligation. A blanket determination applied to a category of roles without individual assessment fails the reasonable care test. If the client fails that test, it becomes the deemed employer liable for PAYE and National Insurance, even if there is an agency in the chain.

If you receive an SDS and disagree with it, you have a formal challenge route: the 45-day client-led disagreement process. Present written representations setting out why the determination is incorrect, with reference to your control, substitution rights, contract terms, and actual working practices. If the client does not respond within 45 days, it is treated as failing to meet its obligations and the deemed-employer liability moves to the client until it responds. Our guide to the Status Determination Statement and our post on how to challenge an IR35 determination cover this in detail.

Is this employment income from inside off-payroll engagements?

This is one of the most common questions contractors ask when completing a self-assessment tax return, and it is worth answering explicitly because confusion here leads to returns being filed incorrectly.

Income from an engagement treated as inside the off-payroll working rules is employment income. PAYE and employee National Insurance are deducted from the deemed direct payment by the fee-payer before any money reaches your PSC. By the time the net amount lands in the PSC's bank account, the employment income has already been taxed at source. It is not self-employment income and it should not be entered on the self-employment pages of your self-assessment return.

When HMRC's self-assessment system (or the SA100 supplementary pages) asks whether you received employment income from inside off-payroll engagements, you confirm that you did, and that it was taxed at source via the deemed direct payment mechanism. You do not re-enter the gross amount in the self-employment or trading income sections. Doing so would cause double taxation: you would pay income tax again on income the fee-payer has already taxed via PAYE.

The PSC itself records the net receipt from the fee-payer as income already subject to the off-payroll rules. When the director draws that money out of the company (as salary or dividend), no further personal tax charge arises on that specific pool of income, because it has already been taxed. What you lose on a Chapter 10 inside engagement is not a second layer of tax; it is the opportunity to extract income tax-efficiently via a salary-and-dividend split, because the income has already been taxed broadly like a salary before it arrives. This is one reason some contractors on persistently inside engagements prefer an umbrella arrangement over maintaining a PSC.

If you are uncertain about how to record inside-IR35 income on your self-assessment return, our contractor self-assessment guide walks through each section of the return for PSC directors.

How the deemed direct payment works

When the fee-payer receives a payment from the client for your services, it does not pay the full amount to your PSC. Instead, it calculates the deemed direct payment: the invoice total, minus VAT, minus the direct cost of any materials paid by the client directly to third parties. That net figure is what PAYE and National Insurance are calculated on.

For example, if your PSC invoices £10,000 plus £2,000 VAT and the client has paid £500 of materials directly, the deemed direct payment is £9,500. The fee-payer operates PAYE on £9,500, deducts employee National Insurance at 8% (on earnings between the primary threshold and the upper earnings limit) or 2% (above the upper earnings limit), and also accounts for employer National Insurance at 15% on amounts above the secondary threshold (£5,000 for 2026/27). The apprenticeship levy (0.5%) applies if the fee-payer's annual payroll bill exceeds £3m. The net amount after deductions flows to the PSC.

There is no 5% expenses allowance under Chapter 10. Under Chapter 8 (small clients), the PSC can deduct a flat 5% of engagement income as an administrative expenses allowance when calculating the deemed employment payment. That allowance was removed for Chapter 10 engagements. For a contractor moving from a small-client Chapter 8 role to a large-client Chapter 10 role on the same day rate, the loss of the 5% is a real cost difference even before considering any tax treatment differences.

If the fee-payer fails to remit the PAYE and National Insurance to HMRC, the debt-transfer provisions allow HMRC to pursue other parties up the supply chain (the next agency, then the end client). The end client is the ultimate backstop. This is why large clients scrutinise their supply chains carefully and why contractors should check that their direct agency has a sound compliance record before signing an engagement. Our post on fee-payer liability and IR35 covers the debt-transfer mechanics in full.

Overseas clients and when Chapter 10 does not apply

Chapter 10 applies only where the end client has a presence in the United Kingdom. Where the client is wholly overseas with no UK permanent establishment, it sits outside the scope of Chapter 10. In that scenario, the PSC self-assesses under Chapter 8, as if the client were a small UK company.

This matters practically for contractors who work remotely for foreign companies. If the client has no UK office, no UK-registered subsidiary, and no other form of UK fixed business presence, Chapter 10 does not apply, and the PSC bears the status risk itself. If the overseas company does have a UK permanent establishment (a registered branch, a UK office through which the services are effectively delivered, or similar), Chapter 10 can apply in the normal way, and the client's UK entity carries the obligation to issue an SDS.

The test is not where you physically work; it is whether the client has a qualifying UK presence. A contractor working from a UK home office for a US company with no UK entity is in a Chapter 8 self-assessment position. A contractor working from home for a US company that has a UK registered company subsidiary that manages the engagement is likely in a Chapter 10 position via that UK entity.

If in doubt about whether your overseas client's UK presence triggers Chapter 10, take specific advice before assuming you are in Chapter 8. An incorrect self-assessment on a Chapter 10 engagement leaves the liability chain in an unclear state, and HMRC may treat the client's UK entity as the deemed employer if it later investigates.

The April 2024 offset: protection against double taxation on reclassification

Before April 2024, when HMRC found that an engagement had been incorrectly treated as outside the off-payroll rules, it assessed the deemed employer for the full PAYE and National Insurance as if the engagement had been inside from the start, with no credit for taxes the contractor and PSC had already paid on the same income. This created potential double taxation: the income was taxed once on an outside-IR35 basis (corporation tax on PSC profits, income tax on salary and dividends, employee National Insurance) and again via the deemed employer's PAYE assessment.

From 6 April 2024, a statutory offset changed this. Where HMRC raises an assessment finding the engagement was inside, it can reduce the deemed employer's PAYE and National Insurance liability by the taxes already paid by the worker and the PSC on that income. The credits that can be offset include:

• Corporation tax paid by the PSC on profits from the engagement
• Income tax paid by the contractor on salary drawn from the PSC
• Employee National Insurance paid on that salary
• Income tax paid on dividends distributed from the PSC (at 10.75%, 35.75%, or 39.35% for 2026/27, after the £500 dividend allowance)

The offset does not eliminate the liability. Employer National Insurance is not credited, because it was never paid on the outside-IR35 basis in the first place. The offset reduces the PAYE bill but does not bring it to zero. The practical effect is that the financial consequence of an incorrect "outside" determination is materially lower post-April 2024 than it was before, which reduces (but does not remove) the risk of a retrospective investigation for engagements from April 2017 onward.

The offset is not something you apply for. It operates when HMRC raises a trigger-event assessment on or after 6 April 2024, and HMRC works through the figures at that point by reference to returns filed by the worker and PSC. It is best understood as a structural protection in the system, not an active claim. Our guide to the private sector off-payroll rules covers the offset and the debt-transfer chain in full detail.

The CEST tool: what it does and its limits

HMRC provides the Check Employment Status for Tax (CEST) tool online as a way for clients and contractors to assess whether an engagement is inside or outside IR35. Where the CEST tool produces a result, HMRC has stated it will stand by that result provided the information entered accurately reflects the engagement's real facts.

CEST is useful as a starting point, particularly for clients issuing large numbers of SDSs who want a consistent methodology. It runs through questions on substitution, control, financial risk, and the nature of the engagement, and produces an inside, outside, or undetermined result. An "undetermined" result means the tool cannot reach a conclusion on the facts entered, not that the engagement is inside or outside.

The tool's limitations are well documented. It has historically been criticised for failing to adequately weight mutuality of obligation, for producing results that diverge from tribunal decisions in some cases, and for giving different outcomes on the same facts depending on how questions are phrased. HMRC has updated the tool over time, but it should never be treated as definitive. It is one input into a properly reasoned status assessment, not a substitute for one. For a hands-on walkthrough of how to use it, see our guide to how to use the CEST tool.

How Chapter 10 compares to Chapter 8

The table below summarises the practical differences between the two regimes for the most common scenario: a PSC contractor engaged through an agency.

Feature	Chapter 8 (small client or overseas)	Chapter 10 (medium/large client)
Who decides status	The PSC (contractor)	The end client (via SDS)
Who operates PAYE if inside	The PSC via deemed employment payment	The fee-payer (agency or client)
5% expenses allowance	Yes (deducted from deemed employment payment)	No (abolished for Chapter 10)
Primary PAYE liability if wrong	The PSC	The fee-payer, transferring up to client
Formal challenge process	HMRC enquiry or tribunal	45-day client-led disagreement process
April 2024 offset	Not applicable (PSC holds own liability)	Yes (credits prior taxes on reclassification)

For most contractors, the practical choice is not between the two chapters; it is imposed by the client's size. What you can influence is whether your SDS accurately reflects your working practices, whether you use the disagreement process if it does not, and whether you structure your affairs correctly for whichever chapter applies. If your working life mixes small-client Chapter 8 engagements with large-client Chapter 10 engagements, our guide to PSC and limited company contractor tax covers how to manage both in the same company.

Where to go next

This hub is the starting point. The specialist guides below go into the detail on each topic:

• What is IR35 and how do the status tests work (control, substitution, mutuality of obligation)
• Off-payroll working rules in the private sector (deep dive: SDS mechanics, fee-payer PAYE, debt transfer, 2024 offset)
• IR35 small company exemption (Companies Act size test, qualifying period, worked examples)
• Status Determination Statement guide (what a valid SDS must contain, how to read one)
• Challenging an IR35 determination (the 45-day process in practice)
• Inside IR35: your options and take-home
• Inside IR35 take-home explained
• How to use the CEST tool
• Fee-payer liability and the debt-transfer chain
• Contractor self-assessment guide (where to enter inside-IR35 income on your return)

If you are unsure which chapter applies to your current engagement, or you have received an SDS you want to check, our team can review your position. Start with a free IR35 status review or see our full range of contractor accountancy services.