Why do I have to pay tax twice a year to HMRC?

You do not pay tax twice for the same year. HMRC asks for Payments on Account — advance payments towards your next tax bill. Each payment is roughly half of your previous year's tax liability. When you file your actual tax return, these advance payments are deducted from the final bill. If you overpaid, you get a refund. If you underpaid, you pay a balancing payment.

How do I reduce my Payments on Account?

You can reduce Payments on Account if you expect your next year's tax bill to be lower. Log in to your HMRC online account, go to Self Assessment, and select 'Reduce Payments on Account'. You can also do this via form SA303. Be careful: if you reduce them too much and your actual bill is higher, HMRC charges interest on the shortfall from the original due date.

What happens if I miss the 31 July Payment on Account?

If you miss the 31 July deadline, HMRC charges interest from 1 August at the prevailing rate (currently around 7.75% per annum). There is no immediate penalty for being a few days late, but interest accrues daily. If you are more than 30 days late, a 5% penalty is added to the unpaid amount. Further penalties apply at 6 and 12 months.

Do Payments on Account include Class 2 and Class 4 NICs?

Yes. Payments on Account are based on your total Self Assessment bill, which includes Income Tax, Class 4 National Insurance contributions, and any Student Loan repayments due through Self Assessment. Class 2 NICs are collected through Self Assessment and are therefore included in the calculation. However, Capital Gains Tax is excluded from Payments on Account and is paid all at once via the balancing payment.

Contractors

IR35 Explained: What It Means for UK Contractors in 2026/27

📅 Updated 2 June 2026 ⏱ 12 min read ✍️ PayToolkit Editorial

IR35 is one of the most significant pieces of tax legislation affecting UK contractors and freelancers. Yet it remains widely misunderstood. This guide explains exactly what IR35 is, how to determine your status, and what the difference means for your actual take-home pay in 2026/27.

What is IR35?

IR35 is the informal name for the off-payroll working rules, originally introduced in 2000. The legislation is designed to prevent tax avoidance by workers who HMRC considers to be "disguised employees" — people who work essentially as permanent employees but bill through a limited company to pay less tax.

The name comes from the number of the original Inland Revenue press release: Inland Revenue 35. Despite numerous reforms, the name has stuck.

The core question IR35 asks is: if you strip away the limited company structure, would the working arrangement look like employment? If yes, HMRC says you should pay employment taxes regardless of how the contract is structured.

Inside vs Outside IR35 — What Does It Mean?

Outside IR35 means your contract falls outside the off-payroll working rules. You are genuinely operating as a business, not a disguised employee. You can continue to pay yourself a modest salary and take the rest of your earnings as dividends, significantly reducing your tax burden compared to employment.

Inside IR35 means HMRC considers your engagement to be essentially employment. You must pay Income Tax and National Insurance Contributions as if you were an employee, using a process called a "deemed payment." The benefits of operating through a limited company are effectively removed for that contract.

How is IR35 Status Determined?

IR35 status is assessed based on the actual working practices of the engagement, not just what the contract says. The key factors HMRC and courts consider include:

Substitution: Can you send a substitute to do the work instead of you personally? A genuine contractor can substitute; an employee cannot. This is one of the strongest indicators of outside IR35 status.

Control: Does the client control how, when, and where you work? High levels of control suggest employment. A contractor who decides their own working methods and hours points toward outside IR35.

Mutuality of obligation: Is there an ongoing obligation for the client to offer work and for you to accept it? Employees have this; contractors should not. Outside IR35 contracts should end when the specific project or deliverable is complete.

Financial risk: Do you risk your own money in the business? Genuine contractors quote fixed prices, correct errors at their own cost, and carry professional indemnity insurance.

Integration: Are you genuinely part of the client organisation? Using a client email address, appearing on org charts, attending company socials — these all suggest employment.

Who Decides IR35 Status?

Since the April 2021 reforms to the off-payroll working rules, the responsibility for determining IR35 status shifted for medium and large engagers (the end clients). Previously, contractors assessed their own status. Now:

Small clients (under 50 employees, under £10.2m turnover) — the contractor still decides their own status
Medium and large clients — the end client (the company hiring you) must assess and communicate your status using a Status Determination Statement

HMRC provides a tool called CEST (Check Employment Status for Tax) at gov.uk, though it has been criticised by contractor groups for being biased toward inside IR35 determinations.

The Real Financial Difference

The financial impact of inside versus outside IR35 is substantial. For a contractor billing £500 per day on 220 working days (£110,000 gross):

Outside IR35 (optimal structure):

Salary: £12,570
Dividends: approximately £72,000 (after corporation tax)
Total take-home: approximately £80,000–£85,000
Effective rate: around 25–28%

Inside IR35 (through umbrella company):

Employer NICs deducted before you receive anything
Subject to full Income Tax and Employee NICs
Total take-home: approximately £62,000–£65,000
Effective rate: around 40–43%

The difference — typically £15,000–£25,000 per year — is why IR35 status matters so much to contractors.

Calculate your inside vs outside IR35 take-home
Use our free IR35 Calculator to see the exact difference for your day rate. Instant results, no signup required.

What Happens if You Get It Wrong?

If HMRC determines you should have been inside IR35, the consequences can be severe. You can face a bill for unpaid tax and NICs going back up to six years, plus interest and penalties. HMRC has been increasingly active in pursuing historical IR35 cases, particularly against contractors in the public sector and large financial services firms.

To protect yourself, keep clear records of your working practices, ensure your contracts properly reflect the genuine nature of your engagement, and consider getting an IR35 contract review from a specialist (companies like Qdos offer these from around £99 per contract).

IR35 and the Umbrella Company Option

If you are placed inside IR35, many contractors work through an umbrella company rather than maintaining their own limited company. An umbrella company acts as your employer, handling PAYE and NICs on your behalf. The typical umbrella margin is £15–£25 per week.

Working through an umbrella when inside IR35 is straightforward and compliant, though it means you receive employment income with no tax efficiency benefits. If most or all of your contracts are inside IR35, it may not be worth the cost and complexity of maintaining a limited company at all.