IR35, also known as the off-payroll working rules, is a set of tax legislation designed to prevent contractors who work like employees from paying less tax and National Insurance by operating through a limited company.

For UK agency founders, IR35 determines whether the contractors you engage must be treated as employees for tax purposes, even though they invoice through their own personal service company (PSC). If a contract falls inside IR35, the agency (or the end client) becomes responsible for deducting income tax and National Insurance from the contractor's fees, just as you would for a permanent employee. This removes the contractor's ability to take dividends and pay lower tax rates.

The rules apply differently depending on the size of your end client. For medium and large clients (meeting at least two of: turnover over £10.2m, balance sheet over £5.1m, or over 50 employees), the client must determine the contractor's status and pass that determination to you. For small clients, the responsibility stays with the contractor's PSC. As an agency, you are the fee-payer in the chain, meaning you must operate payroll deductions if the client tells you the role is inside IR35.

Key financial implications for your agency include:

  • You must deduct PAYE income tax and employee National Insurance (12% on earnings between £12,570 and £50,270 for 2025/26) from the contractor's fees
  • You must pay employer National Insurance (15% on earnings above £9,100 for 2025/26) and apprenticeship levy (0.5% on pay bills over £3m)
  • The contractor loses access to dividend tax rates (8.75% basic rate, 33.75% higher rate) and the £500 dividend allowance
  • You must provide a status determination statement to the contractor and the next party in the chain

If you get the determination wrong, HMRC can pursue you for unpaid tax, interest, and penalties. The contractor cannot claim travel and subsistence expenses against inside-IR35 engagements either.

When this matters for agency founders: IR35 directly affects your contractor margins, your payroll administration burden, and your risk exposure. You must have a robust process for receiving and acting on status determinations, and you should consider indemnity clauses in your contracts with end clients to protect your agency if they provide incorrect determinations.