Your client decided you are an employee. Your American return has to agree

Figures relate to tax year 2025-26 (UK) · 2025 (US)

You have contracted through your own British limited company for years, taking a small salary and the rest as dividends. It is an ordinary arrangement and it has worked perfectly well.

Then a client issues a status determination saying the engagement sits inside the rules. IR35 does not change what you do each day. It changes how the money reaches you, and that reaches straight through to your American return.

Key takeaways

• An inside IR35 determination treats the engagement as employment for tax.
• The fee arrives after deductions rather than as company turnover.
• The dividend route largely disappears once IR35 applies.
• America sees wages where it previously saw dividends.
• Your foreign tax credit calculation shifts between income categories.
• The company may still exist with very little flowing through it.

What is IR35?

IR35 is the British rule that looks past your company to the real relationship. It asks whether you would be an employee if you contracted with the client direct. According to HMRC guidance, the IR35 test weighs control, substitution and mutuality of obligation. The contract wording matters less than what actually happens.

Inside IR35 means employment for tax. Outside IR35 means genuine self-employment.

Nothing about employment law rights changes either way.

Who decides the status?

Medium and large private sector clients decide, and so does every public sector body. Each issues a status determination. Small clients leave the IR35 decision with your own company, which keeps the old position for that work.

The party paying your company usually operates the deductions.

So a client decision reaches your bank account without you doing anything.

What changes in how you are paid?

Inside IR35, income tax and National Insurance come off before the money reaches your company. What arrives has already been taxed. Paying it out again as a dividend would tax the same money twice.

So the fee generally passes through to you without a second charge.

Your company becomes a conduit rather than a trading vehicle.

A worked example

The figures below are illustrative and use round numbers to show the mechanics.

Mike is American and contracts in London through his own company, billing £120,000 a year. Previously he took £12,000 as salary and the rest as dividends.

A client then rules the engagement inside IR35. The fee now arrives with roughly £45,000 already deducted, and the balance reaches him as deemed employment income.

His American return changes shape entirely. Wages replace dividends, the earnings exclusion becomes relevant where it was not before, and the credit calculation moves between categories.

The two positions compared

Why does the American return change?

Because the income category changes. America sorts income into categories before anything else. Dividends and wages sit in different places for the credit. They also attract different rates and touch other reliefs differently.

Wages can qualify for the earnings exclusion. Dividends never do.

Tell whoever prepares your return the moment a determination lands.

Our guide to Form 1116 income baskets explains why the category matters.

Does the exclusion suddenly become useful?

Sometimes, though the credit still wins for most people on British rates. The exclusion covers earned income only. So an inside IR35 decision is the moment it opens up for somebody who used to take dividends.

Higher British rates usually still favour the credit.

Our guide to Form 2555 and the exclusion sets out the alternative.

What happens to National Insurance?

Both employee and employer contributions apply. The employer element often comes out of the agreed rate rather than sitting on top. That is why an inside IR35 rate feels so much worse than the same number outside.

None of it creates an American credit, because it is not income tax.

Our guide to voluntary National Insurance covers the contribution record.

Should you keep the company?

Often yes, at least while some work stays outside IR35. Closing it carries its own cost in time and fees. A company holding reserves, or serving small clients who make their own decision, still earns its place in the structure.

An American owner carries annual reporting for it regardless.

Our guide to Form 5471 categories covers that reporting.

Can you challenge a determination?

A formal route lets you ask the client to reconsider, and they must reply within a set period with reasons. IR35 challenges succeed most often where the determination was generic. A decision based on your actual working arrangements is much harder to shift.

Blanket decisions across a whole category are weaker than specific ones.

Ask for the assessment tool output they relied on. It often reveals a generic answer.

Keep evidence of how the engagement really works.

How to handle an inside decision

1. Read the determination and the reasons given for it.
2. Compare the inside rate offered against your previous effective take-home.
3. Check whether the employer contributions come out of your rate.
4. Work out how the income now appears on your American return.
5. Test the exclusion against the credit on the new figures.
6. Decide what role the company still plays, if any.
7. Review the position again at each renewal, not just the first time.

What if you work through an umbrella company?

Then you are an employee of that umbrella, and the IR35 question falls away entirely. There is no intermediary company left to look through. Your American return simply shows wages, which keeps the filing straightforward.

Umbrella costs come out of the assignment rate too.

Check the umbrella margin and what it actually covers before signing.

Compare the net figure rather than the headline day rate.

Does it affect work for American clients?

Not directly, because IR35 applies to the British engagement and the British client. Work you bill to an American client through the same company stays outside the regime, so the two streams can be treated quite separately.

So a mixed practice can sit inside IR35 for one client and outside it for another.

Bill the two streams separately so the split is obvious in the accounts.

Our guide to UK contractors with US clients covers that side.

What about expenses?

They narrow sharply inside IR35, because an employee claims far less than a company can. Travel to a single client site becomes particularly hard to claim, and America applies its own restrictive rules to employee expenses as well.

America has its own restrictive rules on employee expenses.

Assume the costs come out of taxed income unless somebody confirms otherwise.

Does IR35 change your employment rights?

No, and that is the part people find hardest. An inside IR35 decision applies to tax alone. It gives you no holiday pay, no sick pay and no redundancy rights from the client.

You pay like an employee and you are treated like a contractor.

Some clients offer a small uplift to reflect this. Most do not.

Price that into the rate you accept.

What records should you keep?

The status determination itself, the contract, and notes on how the work really ran day to day. Keep emails showing you set your own hours, turned work down, or sent a substitute, because that is the evidence a challenge rests on.

That evidence is what supports an IR35 challenge.

Collect it as you go. Reconstructing it later is much harder.

Does the client bear any risk?

Yes, and that is why so many play safe. Where the client gets the IR35 decision wrong, the liability can land on them or on the fee payer rather than on you.

Blanket inside decisions are the natural result of that risk.

A client willing to discuss the detail is usually one who assessed properly.

Knowing it helps you judge how firm a determination really is.

What if you move back to America?

IR35 stops mattering once the work is no longer British, and your American filing simplifies because the income becomes domestic again. A British company left behind still needs winding up properly rather than simply abandoning it.

A British company left behind still needs winding up properly.

Our guide to moving back to the US covers the return.

How do you compare an inside rate fairly?

Work back to take-home rather than comparing day rates side by side. An inside rate that looks 10% higher can leave you worse off once employer contributions and the lost expense claims come out of it.

Do the sum on both returns, not just the British one.

A spreadsheet built once can be reused at every renewal.

Does it affect your pension planning?

It can help, oddly. Employer contributions from an umbrella or a deemed payment can still be efficient, and a salary sacrifice arrangement may be available where it was not before.

Americans need a treaty position for the relief to work.

Confirm the scheme accepts contributions from a deemed payment first.

Our guide to employer pension contributions covers the claim.

What if the determination arrives mid-contract?

It applies from the date the client says, not from the start of the engagement, so a year can split into two halves with different treatment. That makes both returns more awkward than a clean break would.

Keep the payslips and invoices separated by period.

Each half needs its own figures on the American side.

Does the agency sit in the chain?

Usually, and it matters because the fee payer operates the deductions. Where an agency sits between you and the client, the agency normally does the paying and therefore the withholding.

The client still makes the decision itself.

So two different parties hold two different parts of the process.

What about overseas clients with UK work?

A client wholly outside Britain with no British connection generally falls outside the regime, which leaves the decision with your own company again. The detail of their presence here matters.

A British branch or subsidiary can change the answer.

Check the contracting entity rather than the group name.

Mistakes and penalties we see with IR35

The first is accepting an inside IR35 rate without recalculating take-home. The same number means far less inside.

The second is paying a dividend from money already taxed at source. That taxes the same income twice.

The third is leaving the American return structured for dividends when the income is now wages.

The fourth is assuming an IR35 determination carries over to the next contract. Each engagement stands alone.

How US UK Tax Accountants helps

We model the inside and outside IR35 positions on both returns, so you can see what a rate is really worth before accepting it. Then we restructure the American filing around the new income category.

We also look at whether the company still earns its keep. Our UK self assessment service covers the British filing.

If a client has just issued a determination, get in touch before you sign the renewal. The numbers change more than the paperwork suggests.

Last reviewed 1 October 2026. This article is general information and not personal tax advice. Every engagement turns on its own facts, so take advice on yours before accepting one.