Britain’s freelance economy is showing fresh signs of strain as contractors increasingly turn down work in protest at tax rules that can slash take-home pay by as much as 30 per cent.
New research suggests the Government’s IR35 regime is continuing to reshape the UK labour market, driving friction between clients and highly skilled contractors while reducing access to flexible talent.
A survey of 505 contractors, conducted by IPSE — the self-employed trade body — and insurance provider Qdos, found that 63 per cent had rejected an offer of work in the past year solely because it was deemed “inside IR35” by the client.
That figure marks a sharp rise on the previous year, when 52 per cent reported turning down similar engagements, underlining growing resistance within parts of the freelance sector.
Under IR35 rules, contractors classified as “inside” are treated as employees for tax purposes, despite lacking many of the rights and protections associated with permanent staff. In practice, many are forced to operate via umbrella companies, a shift that can significantly reduce net pay.
Industry figures say take-home earnings can fall by up to 30 per cent once employers’ National Insurance contributions are effectively passed on through umbrella arrangements and other deductions.
The rules, which were extended to the private sector in 2021 following earlier reforms in the public sector, place the responsibility for determining employment status on the client rather than the worker.
Critics argue this has created uncertainty in hiring decisions, slowed recruitment processes and discouraged companies from engaging specialist contractors at pace.
The latest findings suggest that uncertainty is now feeding directly into workforce behaviour.
One in four contractors surveyed said they were currently out of work, while nearly two-thirds reported declining confidence in securing “outside IR35” roles over the coming year.
For many freelancers, the distinction between “inside” and “outside” IR35 has become decisive in whether they accept assignments at all, effectively reshaping the availability of flexible labour across sectors such as technology, finance and engineering.
IPSE’s managing director Vicks Rodwell said the findings highlight the growing damage being done to the contractor market, warning that the rules are undermining the flexibility and responsiveness that businesses rely on.
Supporters of the framework argue it is necessary to prevent tax avoidance through disguised employment, ensuring fairness between permanent staff and contractors performing similar roles.
But critics say the system has become overly rigid, discouraging genuine self-employment and pushing experienced professionals out of the market or into less favourable working arrangements.
The result, according to industry voices, is a tightening labour pool at a time when demand for specialist skills remains high — with some firms increasingly struggling to secure the contractors they need.
As pressure mounts on both sides of the debate, the future of IR35 remains a flashpoint in Britain’s wider struggle to balance tax compliance with labour market flexibility.
Vicks Rodwell, Managing Director at IPSE, said: “If you’re a business, the appeal of working with contractors should be that you get quick and flexible access to specialist talent. But that’s being undermined by the IR35 rules. They create unnecessary barriers on both sides of the hiring process.
“Businesses are struggling to fill contract roles because highly skilled contractors are walking away from opportunities that they believe are being wrongly assessed as inside IR35.
“It’s tough enough out there for people looking for work without making flexible hiring harder than it needs to be.”
Seb Maley, Qdos Chief Executive, said: “There’s still so much work to be done to ensure genuinely self-employed freelancers and contractors are given the opportunity to work in this way – by this, I mean outside of IR35.
“Given the financial implications of working inside IR35 or on the payroll, it’s no surprise that contractors often say no – and the fact that individuals are rejecting work in this uncertain climate tells you everything you need to know.
“This is only going to backfire on businesses, which lose out on highly-skilled, flexible talent, while also absorbing employers’ NI costs, often needlessly.”
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