Inside vs Outside IR35: What Insurance Changes?

Introduction

If you're a contractor or freelancer working in the UK, you've likely heard the term "IR35" thrown around. But what does it actually mean, and more importantly, how does your IR35 status impact your insurance requirements?

IR35, formally known as the Intermediaries Legislation, is a tax rule that determines whether you're classified as an employee or a self-employed contractor for tax purposes. Your classification has significant implications—not just for your tax bill, but also for the type and level of insurance coverage you need.

This guide explores the critical differences between inside and outside IR35 status, how each classification affects your insurance obligations, and what coverage you should prioritize depending on your situation.

What is IR35? The Basics Explained

Understanding the Rule

IR35 is legislation designed to prevent tax avoidance by contractors who work in ways that are similar to employees but claim self-employed status. Essentially, HMRC uses IR35 to determine whether a contractor should be taxed as an employee or as a genuinely self-employed individual.

If you fall "inside IR35," you're treated as an employee for tax purposes, even though you're technically self-employed. If you fall "outside IR35," you're treated as genuinely self-employed with the associated tax advantages and responsibilities.

The Key Distinction

The main difference comes down to control, substitution, and mutuality of obligation:

Control: Does the client control how, when, and where you work?
Substitution: Can you send someone else to do your work?
Mutuality of Obligation: Is there an ongoing obligation for the client to provide work and for you to accept it?

If the answer to these questions suggests an employment-like relationship, you're likely inside IR35. If you have genuine independence, you're likely outside IR35.

Inside IR35: What It Means for Your Business

Tax Implications

When you're classified as inside IR35, you're treated as an employee for tax purposes. This means:

You pay Income Tax and National Insurance contributions at employee rates
Your client is responsible for deducting tax and National Insurance (through PAYE)
You lose many of the tax advantages of self-employment, such as claiming business expenses
You may be entitled to statutory benefits like sick pay and holiday pay

Business Structure Changes

Inside IR35 contractors often operate through limited companies, but the tax treatment changes significantly. Your limited company becomes more of a pass-through entity, and the tax efficiency typically associated with limited company structures diminishes.

Many inside IR35 contractors find their take-home pay is similar to—or sometimes lower than—an equivalent employee, despite the additional administrative burden of running a limited company.

Outside IR35: Independence and Tax Efficiency

Tax Advantages

Contractors classified as outside IR35 enjoy genuine self-employed status, which brings several tax benefits:

You pay self-employed National Insurance contributions (typically lower than employee rates)
You can claim a wide range of business expenses, reducing your taxable profit
You retain greater control over your tax planning
Limited company structures can offer additional tax efficiency through corporation tax rates

Business Flexibility

Outside IR35 status provides genuine flexibility. You can:

Work for multiple clients simultaneously
Control your working hours and location
Decide how to deliver your services
Hire substitutes or subcontractors
Build a scalable business model

Insurance Requirements: Inside IR35 vs Outside IR35

Professional Indemnity Insurance

Outside IR35: Professional Indemnity Insurance (PII) is typically essential for outside IR35 contractors, particularly in professional services sectors such as IT, consulting, accounting, law, and engineering. Since you're genuinely self-employed, you bear full responsibility for your work and any errors or omissions.

PII protects you if a client claims you've provided negligent advice or made a costly mistake. Premiums are usually based on your turnover and the nature of your work, and you have flexibility in choosing coverage limits.

Inside IR35: Inside IR35 contractors often have reduced PII requirements. Since you're treated as an employee, your client may carry employer's liability insurance that extends some protection to you. However, you should clarify this with your client—many still require inside IR35 contractors to maintain their own PII as a contractual requirement.

The key difference: outside IR35 contractors typically need more comprehensive PII coverage because they bear greater liability risk.

Public Liability Insurance

Outside IR35: If you work on client premises or interact with the public, public liability insurance is essential. This covers claims if someone is injured or their property is damaged due to your work.

For outside IR35 contractors working in trades, construction, or client-facing roles, public liability insurance is often a contractual requirement and can cost between £100–£500+ annually, depending on your sector.

Inside IR35: Inside IR35 contractors may have public liability coverage through their client's employer's liability insurance, but this isn't guaranteed. You should verify coverage with your client before assuming you're protected. Many clients still require inside IR35 contractors to maintain their own public liability insurance as a contractual safeguard.

Employers Liability Insurance

Outside IR35: If you hire employees or subcontractors, you're legally required to carry employers liability insurance. This covers claims from your employees if they're injured or become ill due to your work.

If you work solo without employees, employers liability insurance isn't legally required, though some clients may request it contractually.

Inside IR35: Inside IR35 contractors typically don't need employers liability insurance unless they employ staff. However, if your contract involves supervising or managing other workers on behalf of your client, clarify whether you need coverage.

Tools and Equipment Insurance

Outside IR35: As a genuinely self-employed contractor, you own and are responsible for your tools and equipment. Tools and equipment insurance protects against theft, loss, or damage. This is particularly important for tradespeople, construction workers, and contractors who carry valuable equipment to client sites.

Premiums typically range from £50–£300+ annually, depending on the value of your equipment.

Inside IR35: Inside IR35 contractors may have less need for tools and equipment insurance if their client provides all necessary equipment. However, if you use your own tools, you should maintain coverage. Clarify with your client who bears responsibility for equipment damage or loss.

Business Insurance and Contents

Outside IR35: Outside IR35 contractors often maintain dedicated business premises (home office, workshop, or studio) and may need business contents insurance to protect equipment, stock, and materials. If you work from home, standard home insurance typically excludes business use, so business contents insurance becomes essential.

Inside IR35: Inside IR35 contractors working primarily on client premises may have minimal business premises and, therefore, less need for business contents insurance. However, if you maintain a home office or workspace, you should ensure your home insurance covers business use or obtain separate business contents coverage.

Cyber Insurance

Outside IR35: If you handle client data, financial information, or sensitive business information, cyber insurance is increasingly important. This covers costs associated with data breaches, ransomware attacks, and cyber extortion.

For outside IR35 contractors in IT, consulting, or professional services, cyber insurance is highly recommended and often contractually required by larger clients.

Inside IR35: Inside IR35 contractors may have cyber coverage through their client's employer's insurance, but this varies. If you process client data independently, you should maintain your own cyber insurance to protect against breaches and comply with data protection regulations (GDPR).

Contractual Insurance Requirements

Client-Imposed Requirements

Regardless of your IR35 status, your client contract will typically specify insurance requirements. These might include:

Minimum coverage limits for Professional Indemnity Insurance
Public liability insurance thresholds
Cyber insurance for data-handling roles
Proof of insurance before work commences

Outside IR35 contractors typically face more stringent insurance requirements because clients recognize they're engaging with genuinely independent businesses.

Inside IR35 contractors may have slightly reduced requirements, but many clients still insist on comprehensive coverage to mitigate risk.

Verification and Compliance

Always:

Review your contract carefully to identify all insurance requirements
Obtain written confirmation from your client about what's covered under their policies
Maintain proof of insurance (certificates of insurance) and provide them to your client
Update your coverage if contract terms change
Renew policies before expiry to avoid coverage gaps

Cost Implications and Budget Planning

Outside IR35 Insurance Costs

Outside IR35 contractors typically face higher insurance costs because they bear greater liability. Budget for:

Professional Indemnity Insurance: £200–£2,000+ annually (depending on sector and turnover)
Public Liability Insurance: £100–£500+ annually
Tools and Equipment Insurance: £50–£300+ annually
Cyber Insurance: £150–£1,000+ annually
Business Contents Insurance: £100–£500+ annually

Total estimated annual cost: £600–£4,300+ (depending on your sector and risk profile)

Inside IR35 Insurance Costs

Inside IR35 contractors may have lower insurance costs if their client provides some coverage:

Professional Indemnity Insurance: £100–£1,000+ annually (if required)
Public Liability Insurance: £50–£300+ annually (if required)
Cyber Insurance: £100–£500+ annually (if required)

Total estimated annual cost: £250–£1,800+ (depending on contractual requirements)

The key difference: outside IR35 contractors typically invest more in insurance because they assume greater business risk.

Sector-Specific Considerations

IT and Consulting

Both inside and outside IR35 contractors in IT and consulting should prioritize:

Professional Indemnity Insurance (essential for both)
Cyber Insurance (increasingly required by clients)
Public Liability Insurance (if working on client premises)

Outside IR35 contractors typically need higher coverage limits.

Trades and Construction

Tradespeople and construction contractors should focus on:

Public Liability Insurance (essential for both)
Tools and Equipment Insurance (critical for outside IR35)
Professional Indemnity Insurance (especially outside IR35)

Inside IR35 tradespeople may rely more on client-provided coverage, but should verify this in writing.

Professional Services

Accountants, solicitors, and consultants should prioritize:

Professional Indemnity Insurance (essential for both, higher limits for outside IR35)
Cyber Insurance (essential for both)
Public Liability Insurance (if meeting clients in person)

Key Takeaways: Insurance Planning by Status

If You're Outside IR35

Assume full responsibility for insurance coverage
Prioritize Professional Indemnity and Public Liability Insurance
Budget for comprehensive coverage across multiple policy types
Maintain higher coverage limits to reflect your liability exposure
Review contracts carefully to identify all client-imposed requirements
Consider cyber insurance if you handle sensitive data

If You're Inside IR35

Clarify what coverage your client provides
Don't assume you're automatically covered under your client's policies
Maintain Professional Indemnity Insurance if contractually required
Verify public liability and cyber coverage in writing
Budget for selective coverage rather than comprehensive policies
Review your contract annually to ensure compliance

Conclusion

Your IR35 status fundamentally affects your insurance needs, costs, and business risk profile. Outside IR35 contractors typically require more comprehensive coverage because they bear greater liability and business risk. Inside IR35 contractors may have reduced requirements but should never assume they're automatically covered under their client's policies.

The key to effective insurance planning is understanding your specific IR35 classification, reviewing your contract thoroughly, and obtaining written confirmation from your client about what coverage they provide and what you're responsible for.

Whether you're inside or outside IR35, professional indemnity insurance should be a priority if you're in professional services. Public liability insurance is essential if you work on client premises or interact with the public. And cyber insurance is increasingly important for anyone handling sensitive data.

Don't leave your business exposed. Take time to assess your insurance needs based on your IR35 status, sector, and contractual requirements. The investment in proper coverage now protects your business, satisfies your clients, and gives you peace of mind to focus on delivering excellent work.

For personalized advice on insurance requirements for your specific situation, contact Insure24 today. Our team specializes in contractor and professional indemnity insurance and can help you navigate the complexities of IR35 and ensure you have the right coverage in place.