IR35 and PI insurance for UK consultants

IR35 (the off-payroll working rules) determines how a contractor is taxed but does not itself alter professional liability exposure. That said, the IR35 status of a consultant materially affects how PI cover is structured, who holds the policy, and how a status re-classification is treated at renewal.

IR35 in one paragraph

Since April 2021, for medium and large private-sector engagements and all public-sector engagements, the end-client determines the IR35 status of the contractor. Where the engagement is deemed inside IR35, the fee-payer must operate PAYE on payments to the personal service company (PSC) as if the individual were an employee for tax purposes. For small-client engagements (below Companies Act 2006 ‘small’ threshold), the PSC continues to determine its own status.

How IR35 status affects PI structure

Outside IR35 — PSC contract

Standard PI in the PSC name. The PSC contracts with clients and provides consultancy services on own account. PI covers the PSC's liability.

Inside IR35 — PSC-based engagement

For tax purposes the individual is treated as employed. But the PSC remains the contracting party for professional liability. PI stays in the PSC name.

Inside IR35 — umbrella-based engagement

Contractor operates via umbrella company. Contractor is an employee of the umbrella for tax and employment purposes. Professional liability typically rests with the umbrella's master PI policy, with individual contractor coverage under this master.

Sole trader

Freelancer trading as sole trader (rather than through PSC). PI in the individual's name. IR35 doesn't apply to sole traders — but employment-status challenge under separate rules is possible.

Status determination risk

The end-client's status determination can be challenged by HMRC. Where HMRC reclassifies an engagement from outside to inside IR35, back-tax exposure follows — typically the fee-payer (client or agency) rather than the contractor personally.

But this can generate consequential claims: the client may seek to recover part of the exposure from the contractor via contractual dispute, or the contractor's PSC may face secondary tax exposure. PI doesn't cover the tax liability itself but can cover related professional-liability claims arising from the reclassification.

Status challenge claims and PI

The classic scenario: consultant advised a corporate client that their engagement structure was outside IR35. HMRC subsequently reclassifies. Client faces back-tax and seeks recovery from the consultant.

PI response depends on wording:

• Employment-status advice should be specifically covered.
• Tax advice extensions should be reviewed — some wordings exclude tax-advisory work entirely.
• Where the consultant is also a director of the contracting PSC, D&O cover may be relevant alongside PI.

What contractors and consultants should test at renewal

1. Confirm PI is in the correct legal name — PSC, umbrella, sole trader as applicable.
2. Confirm activity coverage for employment-status advice where relevant.
3. Confirm cover for IR35-adjacent work if the consultant advises other contractors.
4. Confirm continuous cover where contractor moves between engagements or between PSC and umbrella.
5. Confirm run-off treatment for PSC closure if contractor moves to permanent employment.

Frequently asked

Related reading

• IT consultants sector pillar
• IR35 employment status IT consultants PII
• IT contractor PI insurance IR35 context
• Management consultants sector pillar