IR35 Threshold Changes: What Businesses and Contractors Need to Know
Changes to the company size thresholds used within the UK’s off-payroll working rules, commonly known as IR35, are set to alter how responsibility for employment status determinations is allocated across the contractor market. The reforms increase the financial thresholds that determine whether a company is considered ‘small’ for IR35 purposes, meaning more businesses will fall outside the off-payroll regime and pass responsibility for IR35 assessments back to contractors.
What the IR35 Thresholds Are
Under the IR35 off-payroll working rules, the responsibility for determining a contractor’s employment status depends largely on the size of the client business engaging the contractor – according to the set parameters from HMRC.
If the client is deemed to be medium or large, the business must assess whether the contractor falls inside or outside IR35 and issue a Status Determination Statement (SDS). If the client is classified as a small company, however, this responsibility shifts back to the contractor’s own limited company, typically a Personal Service Company (PSC). It is the Personal Service Company that should also hold businesses insurances such as Professional Indemnity and IR35 Insurance.
The definition of a small company comes from HMRC via the Companies Act 2006, which sets three size thresholds. A company is considered small if it meets two out of the following three criteria:
- Annual turnover
- Balance sheet total
- Average number of employees.
These thresholds are central to determining whether the off-payroll working rules apply.
What the Previous Thresholds Were
Until the recent reforms, the thresholds for defining a small company were:
- Turnover: not more than £10.2 million
- Balance sheet total: not more than £5.1 million
- Employees: 50 or fewer.
If a business exceeded two of these thresholds, it was treated as a medium or large business and therefore required to take responsibility for IR35 status determinations when engaging contractors.
What the New Thresholds Will Be
Following changes to company size criteria, the financial thresholds are increasing significantly. Under the updated rules:
- Turnover: up to £15 million
- Balance sheet total: up to £7.5 million
- Employees: 50 or fewer (unchanged).
Again, businesses only need to meet two of these three criteria to qualify as a small company.
The rise represents a substantial increase in the financial limits, particularly the turnover threshold, which increases by nearly 50%.
When the Changes Take Effect
The legislative changes to company size thresholds actually applied to financial years beginning on or after 6 April 2025, but their practical impact on IR35 is delayed due to how company size is assessed.
Because company size is determined using previous accounting periods, most businesses will not see the effect of the new thresholds until 6 April 2026 at the earliest, and in many cases April 2027.
This timing means businesses must consider both the updated thresholds and their accounting periods to determine when they will officially qualify as small under the new rules.
The Impact on Businesses and Contractors
The main consequence of the threshold changes is that more companies will fall into the ‘small business’ category. Estimates suggest that thousands of businesses currently considered medium-sized will become classified as small once the new limits apply.
For those businesses, the administrative burden of IR35 compliance will reduce considerably. Small companies do not need to:
- Conduct formal IR35 assessments
- Issue Status Determination Statements
- Operate PAYE for contractors deemed inside IR35.
Instead, responsibility returns to the contractor’s PSC, which must assess the engagement and ensure the correct tax treatment.
What It Means for the Contractor Market
For contractors, the threshold changes may result in more engagements where they control their own IR35 determination rather than relying on a client’s assessment process.
This shift could lead to:
- Greater autonomy for contractors when assessing their working arrangements
- A reduction in blanket IR35 determinations from cautious end-clients
- Fewer businesses required to operate complex IR35 compliance systems.
However, the change does not remove the underlying IR35 legislation itself. Contractors working for newly classified ‘small’ clients will still need to ensure their engagements are correctly assessed and documented to avoid potential HMRC disputes.
A Gradual but Significant Shift
Although the reforms may seem modest at first glance, increasing the thresholds could have a notable impact on the contracting landscape. By expanding the number of businesses classified as small, the government is effectively shifting a portion of IR35 compliance responsibility back to contractors.
For businesses near the threshold boundaries, careful monitoring of turnover, balance sheet figures and workforce size will be essential over the next few years. Likewise, contractors will need to remain aware of which rules apply depending on the size of the client they are working with.
In practice, the updated thresholds represent another evolution of the off-payroll working framework, one that subtly rebalances responsibility between clients and the contractor community.
