The IR35 offset rules came into force on 6 April 2024 to deal with a long-running problem under the off-payroll working rules – the risk of the same income effectively being taxed twice.
Before the change was implemented, if HMRC later determined that the off-payroll working rules had not been applied correctly, the organisation liable for PAYE could be billed without taking account of certain taxes the contractor and their limited company had already paid on the same underlying income.
The IR35 offset allows HMRC to take specified taxes already paid by the contractor and the contractor’s limited company into account when calculating a Chapter 10 off-payroll tax liability.
What is the IR35 offset?
The IR35 offset, effective from 6 April 2024, allows specified taxes already paid by a contractor and their limited company to be taken into account when HMRC assesses a liability under the off-payroll working rules.
The offset applies to Chapter 10 of Part 2 ITEPA 2003 – the off-payroll working regime which applies to public-sector organisations and medium and large private-sector clients. It does not apply to Chapter 8 IR35 cases, where responsibility for applying IR35 remains with the contractor’s intermediary, typically their limited company.
The taxes that may be taken into account include:
- Corporation Tax paid by the contractor’s company in respect of the relevant income
- Income tax paid by the contractor on dividends paid from the relevant income
- Income tax already paid by the contractor on salary or other payments attributable to the relevant engagement, where covered by the offset rules
Why the offset was needed
The issue became more apparent after the off-payroll rules were introduced in the public sector in 2017 and later extended to the private sector in 2021.
If HMRC later decided that an engagement should have been treated as inside IR35 under the off-payroll rules, the resulting PAYE liability could previously be calculated without taking account of tax already paid by the contractor and their company on the same underlying income.
In reality, many contractors will already have paid both company and personal tax on income derived from the engagement in question.
That mismatch meant liabilities could be far higher than the additional tax that would otherwise have arisen.
How the IR35 offset works in practice
If HMRC determines that the off-payroll rules haven’t been applied correctly, specified amounts of Corporation Tax and income tax already paid by the contractor and their company can now be set against the PAYE liability.
HMRC determines the amount available for set-off using information about the relevant engagement and taxes already paid.
The effect is to reduce the off-payroll tax liability to take account of specified tax already collected on the same underlying income.
When the offset may not be applied
Although the rules provide for an offset, there can be circumstances where the mechanism is not applied to a particular historic liability.
In some public sector cases, HMRC has assessed the full liability without applying an offset at the outset.
In the recent Post Office IR35 case (2026), the government confirmed that no offset calculation would be undertaken, leaving contractors to submit refund claims where appropriate.
The mechanism is set out in legislation, but the Post Office case demonstrates that contractors may still need to pursue repayment of tax themselves where an offset has not been made against the organisation’s liability.
Can contractors claim tax back?
Where an offset is not applied and this results in tax having effectively been paid twice on the same underlying income, contractors or their companies may be able to claim repayment of tax already paid.
Depending on the tax involved and the circumstances, this may involve making an Overpayment Relief claim to HMRC. Such claims are generally subject to statutory time limits, commonly four years after the end of the relevant tax year or accounting period.
For older engagements, this means contractors should not assume that tax can be reclaimed indefinitely.
What this means for clients
The offset makes the tax outcome more proportionate, but it doesn’t eliminate the underlying compliance risk of misjudging status determinations.
Organisations remain responsible for making correct status determinations under the off-payroll rules where Chapter 10 applies.
Errors can still result in substantial tax bills, particularly where large contractor projects are involved.
What this means for contractors
For contractors, the offset reduces the risk of tax being collected twice on the same underlying income but does not necessarily eliminate that risk in every case.
Where no offset is applied, contractors may still need to engage with HMRC directly to recover tax which can properly be reclaimed.
This is another example of why it is so important to keep detailed records of past contracts and tax payments.
Further reading
Read HMRC’s technical position here.
You can also read an expert’s analysis of how this works in practice here.