IR35 in 2026: What the New Small Company Thresholds Means for Your Contractor Workforce

Key takeaways

• Confirm whether your business meets at least two of the three statutory size thresholds (turnover, balance sheet total, employee numbers) before you assume anything about your IR35 obligations.
• Check the financial year the test actually applies to, and whether the Companies Act 2006 two-year rule affects your result. Size for off-payroll purposes is based on past accounts, not this year’s trading.
• Consider group and connected-company relationships. A standalone subsidiary can look small on paper while still sitting inside a group that isn’t.
• Confirm who is responsible for IR35 status determinations before you engage a contractor, and put that in writing.

From 6 April 2026, HMRC applied increased size thresholds when working out which businesses count as “small” for the off-payroll working rules or what most people still call IR35. Qualifying as small generally shifts responsibility for the IR35 assessment away from your organisation and back to the contractor’s own personal service company (PSC).

Most established businesses within the small-company limits won’t feel any practical difference until the 2027-28 tax year, as company size is worked out using older financial information, not this year’s figures. HMRC estimates that approximately 14,000 companies may be reclassified as small under new statutory thresholds. For those businesses, the responsibility for IR35 status determination has shifted back to contractors. 

In essence, the rules about who decides have changed; the rules about what makes someone employed or self-employed for tax purposes have not. 

So if your organisation engages contractors through personal service companies (PSCs), this change almost certainly affects how you manage your contingent workforce. This guide explains what changed, how to check whether it applies to you, and what your next steps should be.

What changed for IR35 on 6 April 2026?

Off-payroll working rules place responsibility for IR35 status decisions on the client organisation, unless it’s classed as “small.” Since HMRC applied larger financial thresholds when making that determination, more businesses will now qualify as small.

The 2026 IR35 small company threshold changes

• Before the update, a company qualified as small if it met at least two of three conditions: turnover of no more than £10.2 million, a balance sheet total of no more than £5.1 million, and no more than 50 employees. 
• With the latest update to the small business threshold 2026, those figures rose to £15 million turnover and a £7.5 million balance sheet total, with the 50-employee limit staying exactly where it was.

These are the statutory company-size figures under the Companies Act 2006, not a general commercial idea of what counts as an “SME.” A business that thinks of itself as mid-market could still meet the legal definition of small, and vice versa.

How the two-out-of-three IR35 company-size test works

• A company or organisation only needs to meet two of these three small business thresholds, not all three. Meeting just one condition (say, headcount) isn’t enough on its own, regardless of how comfortably a business clears that particular bar.
• Turnover, balance sheet total, and average employee numbers should come from the relevant statutory accounts. They should be calculated the way company law requires rather than estimated from management information. 
• Turnover excludes VAT and trade discounts. The balance sheet total is calculated before deducting liabilities and employee numbers are averaged across the financial year, not a single headcount snapshot. This is one of the more common ways businesses misjudge their own status. Thus, it’s important to let your finance team run the numbers, not HR or procurement.

Worked examples: when a company is and is not small

Here are a couple of examples to illustrate how these new small business thresholds apply:

1. A business with £14 million turnover, a £4 million balance sheet total, and 45 employees meets two of the three conditions, specifically turnover and balance sheet total. That means it would generally qualify as small, even though its headcount alone might already suggest a mid-sized operation.
2. A business with £18 million turnover, a £9 million balance sheet total, and 45 employees meets only the employee headcount threshold. Because it fails both the turnover and balance sheet tests, it would generally not qualify as small, regardless of how modest its headcount looks next to its revenue.

Important note: These examples are simply illustrative and not a substitute for legal or tax advice. Group structures, transitional rules following a merger or acquisition, and unusual accounting periods can all change the outcome which we cover in more detail below.

Does the IR35 threshold change apply to your business right now?

Just because the changes are dated 6 April 2026, it doesn’t automatically mean that it applies to your business right away.

Why IR35 company size is based on earlier accounts

• Company size for off-payroll purposes is generally assessed using the previous financial year for which the filing deadline had already passed before the relevant tax year began. 
• The Companies Act 2006 thresholds behind this test increased for financial years beginning on or after 6 April 2025, per HMRC’s Employment Status Manual. The reason is that IR35 company size is assessed by reference to the prior financial year, not the current one. So your classification for the 2026-27 tax year is based on your 2024-25 accounts. If those accounts show you as medium-sized under the old thresholds, you remain in scope for the full 2026-27 tax year, regardless of the new thresholds.
• It’s important to not rely on a current-year revenue forecast to decide your status. The effective date of the threshold change and the date your company might actually become small for IR35 purposes are two different things. Learn how to distinguish the difference.

When newly small companies are likely to feel the change

In most cases, and subject to the Companies Act rules on size changes, companies will not feel the practical impact until April 2027 at the earliest. 

HMRC’s own guidance is clear that the effect of the new thresholds is felt on a lag. In most cases, this is the practical timeline:

• For the 2026-27 tax year: company size is usually based on 2024-25 accounts, prepared under the old, lower thresholds.
• For the 2027-28 tax year: company size is usually based on 2025-26 accounts — the first accounting period to which the new, higher thresholds apply.

This means many businesses that fall within the new IR35 small company thresholds and limits won’t actually become small for IR35 purposes until the 2027-28 tax year.

Exceptions, new businesses, and the two-year rule

There are certain situations that may warrant IR35 small company exemption:

• Newly incorporated businesses, companies in their first accounting period, and businesses with recent company size changes may require a different analysis. If you are in this position, take specific advice.
• Under the Companies Act 2006, a company’s classification generally only changes if it meets or fails the relevant conditions for two consecutive financial years. This is called the two-year rule. So one unusually strong or weak year typically won’t flip your classification either way.
• A business close to a threshold, recently restructured, or recently acquired or divested is exactly where the general position stops being reliable. A specialist review of your specific accounting history may be necessary to ensure your business remains compliant. When in doubt, consulting with compliance specialists like CXC is recommended.

What happens to your IR35 obligations if your company is now classified as small?

Small client does not mean IR35-free

Being classified as a small client does not mean an engagement automatically falls outside IR35. The change concerns who operates the off-payroll working rules and who is responsible for the tax-status decision, but not whether the underlying engagement, on its facts, would otherwise be inside or outside IR35. 

The nature of the working relationship still matters every bit as much as it did before.

When responsibility moves back to the contractor’s intermediary

Two chapters of ITEPA 2003 do the heavy lifting here:

• Chapter 10 discusses the off-payroll rules for medium and large private-sector clients. Here, the client assesses the status and, if inside IR35, the fee-payer accounts for tax.
• Chapter 8 contains the original IR35 rules, which state that the contractor’s own PSC assesses the status and accounts for any tax due.

To summarise, under the small-client position, the Chapter 8 provision takes place wherein the contractor’s intermediary takes on the assessment. That doesn’t mean the client is free from all exposure though. Reputational risk, supply-chain due diligence, and the quality of the working relationship still sit with the client, even where the statutory determination duty doesn’t.

Meanwhile, medium and large private-sector clients usually carry the responsibility of status determination under the off-payroll rules.

The 45-day company-size confirmation obligation

• Contractors and agencies are entitled to ask a client/company to confirm its size for IR35 purposes.
• The client has 45 days from the date it receives that request to respond, under the process (which includes a suggested confirmation template) set out in HMRC’s guidance on off-payroll working.
• If that 45-day window is missed, there can be dire consequences. HMRTC can treat the client as medium or large for the purposes of off-payroll working rules until it responds, regardless of true size.
• In practice, that means the client, and not the contractor’s intermediary, becomes responsible for assessing status, issuing a Status Determination Statement, and accounting for tax on that engagement, exactly as if the IR35 small company exemption had never applied. 

This is exactly why who is responsible for IR35 shouldn’t be left to chance. Because a single unanswered request can quietly reinstate obligations a business believed it had left behind.

So build a written response process now. It should ideally include the following: 

• a named owner for company-size enquiries
• a standard template communication for contractor and agency requests
• a clear escalation route. 

That way, a request doesn’t sit unanswered in someone’s inbox for six weeks.

How should employers manage IR35 compliance in 2026?

What IR35 compliance means in practice

IR35 compliance is a repeatable governance process, not a one-off tax exercise.

At minimum, it means identifying every contractor engagement operating through a PSC, confirming your company size, working out who is responsible for the status decision, assessing that status properly, and retaining the evidence behind the decision. 

Treat it as a continuous cycle. New engagements start, existing ones change scope, and each of those moments should trigger the same disciplined process rather than a fresh, ad hoc judgement call.

The assessment has to reflect both the contractual terms and the reality of how the work happens:

• A contract that reads like a genuine independent engagement is worth little if the actual working practices look like employment. 
• Contractor engagements also cut across procurement, HR, finance, legal, and hiring managers, so compliance only really works when those functions pull in the same direction. 
• Without shared ownership, it’s easy for one team to sign off a contract that another team’s day-to-day management quietly contradicts. This can leave the business exposed, regardless of how carefully the paperwork was drafted.

How to assess contractor status accurately

No single factor decides worker classification on its own. There are multiple factors in play:

1. Control: how much say the client has over what work is done, how it is implemented, when and where. A contractor who sets own hours and isn’t supervised per task looks more independent than one taking daily instructions from a manager.
2. Personal service and substitution: whether the contractor must do the work personally, or has a genuine right to send someone else.
3. Mutuality of obligation: whether the client is obliged to continue offering work and the contractor is obliged to accept it. A rolling arrangement where work is guaranteed and expected to continue looks more like employment than a series of discrete, standalone engagements.
4. Financial risk: whether the contractor bears meaningful commercial risk, including the cost of correcting their own mistakes or investing their own resources and equipment.
5. Integration into the organisation: how embedded the contractor is in the organisation’s structure, systems, and teams. Being issued a company email address, being required to attend team meetings, and undergoing appraisals are all signs of operating as part of the business rather than alongside it.
6. Equipment and independence — who supplies the tools, and how independently the contractor otherwise operates.

A job title, a fixed-term contract or a remote-working arrangement can’t settle the question alone as each is just one data point among several. HMRC’s Check Employment Status for Tax (CEST) tool is a useful input for working through these factors consistently, but it should not be used as replacement for evidence-based professional judgement.

Evidence, documentation and review triggers

Here’s a short IR35 compliance checklist for employers covering what to retain for every engagement:

• Contracts and statements of work
• The status assessment itself, with the reasoning behind it
• Any CEST output used to support the assessment
• Evidence of actual working practices, not just the contractual terms
• A record of relevant correspondence with the contractor and agency
• A log of changes to the engagement over time

This matters even where a small client’s contractors bear the primary Chapter 8 responsibility, because good records protect the client’s own position in case a dispute or HMRC enquiry reaches back that far. 

Retaining this evidence is arguably the most overlooked part of what IR35 compliance means in practice. Because the assessment itself is only half the job and being able to show your working, months or years later, is the other half.

Certain events should automatically trigger a fresh review:

• A change of line manager or reporting structure
• An extension to the length of the assignment
• A change in working hours or working pattern
• New or expanded responsibilities
• Increasing exclusivity or integration into internal teams

What should employers do about IR35 now?

Check your size classification and relevant financial year

• Confirm the exact legal entity engaging each contractor, not just the trading name on the invoice. 
• Review the relevant filed accounts against the two-out-of-three test, and check whether group rules apply to your structure (more below). 
• Document the financial period used, the figures, and your conclusion. Remember that a current-year revenue estimate is not enough.

Communicate your IR35 position across the supply chain

• Recommend and implement a written communication process in place for agencies, contractors, and internal stakeholders. That way, nobody is left guessing about SDS responsibilities, fee-payer obligations, or payroll treatment. 
• Include the 45-day response requirement covered above, and assign a named, accountable owner for company-size enquiries.

Build a repeatable contractor-compliance process

A durable process should ideally be able to:

• Identify all PSC contractor engagements across the business
• Confirm company size and who is responsible for the decision
• Assess each role and engagement individually where required
• Align written documentation with actual working practices
• Issue and manage Status Determination Statements where applicable
• Maintain a documented status disagreement process
• Reassess whenever engagement conditions change
• Review the contractor and umbrella supply chain regularly
• Escalate high-risk or borderline cases to specialists rather than guessing

How do group companies and connected businesses affect IR35 company size?

Why legal-entity structure matters

The company engaging the contractor is the starting point for the size test, but not necessarily the end of it. 

HMRC applies anti-avoidance grouping rules specifically to prevent large corporate groups splitting themselves into micro-entities to sidestep off-payroll obligations. 

• Where a hiring business sits inside a wider corporate group, the size test generally can’t be run on that subsidiary in isolation. The group’s combined turnover, balance sheet total, and average headcount typically have to be considered too. 
• If the parent or the aggregated group exceeds the small-company thresholds, individual subsidiaries can lose access to the small-client position even where their own standalone figures look modest, sometimes with only a handful of employees and next to no turnover of their own.

This is also why legal-entity structure affects timing, not just outcome. A standalone company’s size normally builds up gradually, tracked across consecutive financial years. But a group restructuring, acquisition, or takeover can shift the picture far more abruptly. It’s the corporate structure in place, not just the headline numbers, that ultimately determines whether the client or the contractor’s intermediary carries the IR35 risk.

Thus, businesses should not assume each entity in a wider corporate group can be assessed on its own, particularly if there is a wider corporate group or if the group uses centralised procurement, shared workforce functions, or a common back office across multiple legal entities.

When group aggregation can change the answer

Group and connected-company rules can require a wider view of size than the standalone entity suggests, and not every group aggregates figures the same way. In fact, the Companies Act 2006’s own group provisions set out how parent and subsidiary figures interact. Current HMRC guidance should always be checked against your own structure rather than assumed.

The connected-persons rule goes beyond straightforward parent-subsidiary relationships: where multiple companies are controlled by the same individuals or associates, HMRC can look at those businesses together, so their combined turnover and financials may need to be considered when working out whether the thresholds have been crossed.

As a general illustration: a small operating subsidiary sitting inside a much larger parent group may not be able to rely on its standalone turnover to claim small-company status. It is the group’s wider position that actually settles the question, which is exactly the kind of scenario worth a specialist’s eyes before you rely on it.

When employers should obtain specialist advice

Certain situations carry enough complexity to warrant more than a quick internal read of the rules:

1. Parent and subsidiary structures: if your company sits under a parent, or has subsidiaries of its own, the group’s combined figures may matter more than your standalone accounts do.
2. Shared-service or centralised procurement models: if contractors are engaged centrally on behalf of several entities, it isn’t always obvious which legal entity the size test should be applied to.
3. Recent acquisitions, mergers or divestments: a change in ownership can shift your group’s aggregated position overnight, even before your own day-to-day operations and trading have changed at all.
4. Fast growth that puts a business close to the threshold: a strong trading year can tip you just over, or just under, a threshold, and the two-year rule makes the timing of that shift easy to get wrong.
5. Multiple entities engaging the same pool of contractors: the same contractors working across several of your entities can raise real questions about whose size actually governs each engagement.
6. Cross-border group structures with UK contractor engagements: a UK subsidiary of an overseas parent may still need to look at the wider group’s position, not just its own UK accounts.

If any of these apply to your business, treat the group question as a line item for your advisers, not an in-house assumption.

What remains unchanged for medium and large organisations?

Now, If your organisation remains above the small company thresholds (which will be the case for the majority of CXC’s clients) nothing changes in terms of your core IR35 obligations.

Status Determination Statements and reasonable care

Medium and large clients still need to assess employment status and issue a Status Determination Statement before the contractor’s first payment. 

Reasonable care matters here. A generic, role-based assessment isn’t good enough if the real working practices for that engagement differ from the template. Practical signs of reasonable care include:

• Assessing each engagement individually, not by job title alone
• Involving the hiring manager, not just HR or procurement, in the assessment
• Keeping a record of the specific facts considered

For example, treating every “interim project manager” the same way regardless of how each one actually works, or reusing last year’s assessment without checking whether the role has changed, both fall short of the reasonable care standard HMRC expects.

Our IR35 compliance guide for public and private companies goes into this obligation in more depth.

Fee-payer duties, PAYE and National Insurance

When an engagement is deemed “inside IR35,” the fee-payer’s role is to deduct PAYE and National Insurance before the payment is made. The fee-payer is also responsible for accounting for it to HMRC. 

Employer National Insurance costs have been a live issue for inside-IR35 engagements since the rate and threshold changes from April 2025, and they affect the true cost of engaging a contractor through payroll, not just the headline day rate. 

A couple of things to remember:

• This obligation sits with the fee-payer even where a different entity further up the chain made the original status determination
• The exact current figures, and whether any day-rate cost example remains appropriate, should be confirmed with a tax specialist before publication, especially since these numbers move with fiscal events. 

What happens when the fee-payer chain is wrong? For example, assuming an agency further down the chain is handling deductions when it isn’t, can leave more than one party exposed. Our payroll compliance checklist covers the wider record-keeping this creates for fee-payers.

Status disagreements and ongoing oversight

Organisations need a fair, documented process for status disagreements, since contractors and agencies have the right to challenge a determination they believe is wrong. 

• Under the client-led disagreement process, the client must consider the contractor’s representations and respond within 45 days, either confirming the original conclusion with reasons or issuing a new determination.
• Assessments should also be revisited whenever the underlying facts change. For example, a contractor moving from a fixed-scope project onto ongoing, day-to-day work, or picking up line-management responsibilities that weren’t part of the original engagement. Treating the first SDS as permanent, regardless of how the role evolves, is a common source of risk.

HMRC’s Check Employment Status for Tax (CEST) tool can assist with status determinations, though it should be used alongside professional judgement rather than as the sole basis for a determination.

How do the 2026 umbrella PAYE changes connect with IR35?

Alongside the threshold changes, new PAYE rules for umbrella company arrangements also came into force on 6 April 2026. These are separate from the IR35 size threshold changes, but they affect many of the same organisations since businesses that rely on agencies and umbrella companies to engage contractors now need to understand both regimes rather than treating them as one issue.

Why umbrella PAYE reform is separate from IR35 thresholds

• Businesses engaging contractors through agencies and umbrella companies need to understand both, even though one doesn’t determine the other.
• A client’s IR35 size classification has no bearing on its exposure under the umbrella PAYE rules, and vice versa. 
• Not every small client carries the same level of umbrella-related liability either. That depends entirely on the specific supply chain in use, including which parties sit between the client and the contractor, and how the umbrella provider itself operates.

The relevant party and supply-chain risk

Under the new rules:

• Responsibility for deducting PAYE typically sits with the “relevant party” in the supply chain. Usually, this is the agency, or the end client where no qualifying UK-based agency exists. HMRC can pursue that relevant party on a joint and several basis for unpaid PAYE and National Insurance if an umbrella provider gets it wrong. 
• End users are now jointly and severally liable if an umbrella provider fails to account for PAYE and NICs correctly. Even if the end user is not the direct fee payer. This exposure can arise without any knowledge or fault on the part pursued, which is exactly why supply-chain due diligence now matters as much as the IR35 assessment itself. 

This means that if you engage contractors through an agency that uses an umbrella company, and that umbrella company is non-compliant, you could face tax liability too.

Practical umbrella due-diligence actions

Given that the due diligence bar for umbrella arrangements has risen significantly, here are some recommended actions for organisations. 

• Confirm that any umbrella companies in their supply chain are accredited by recognised industry bodies such as FCSA or Professional Passport (noting that HMRC does not operate a formal accreditation scheme). While recognised accreditation from these bodies is a useful signal, it isn’t a substitute for your own due diligence.
• Request evidence from agencies that their umbrella arrangements comply with the new rules
• Review existing agency and umbrella arrangements to ensure appropriate indemnities are in place

For a full breakdown of the umbrella reform changes, read our UK umbrella reform 2026 guide.

Common mistakes with the IR35 small-company exemption

Treating small-company status as a blanket exemption

The IR35 small company exemption is one of the most misunderstood parts of this year’s changes: qualifying as a small client does not remove IR35 from the engagement. 

It only changes who’s responsible for assessing it and accounting for any tax due, but not whether the engagement is inside or outside IR35 in the first place.

For a qualifying small private-sector client:

• Responsibility usually returns to the contractor’s intermediary under Chapter 8.
• Medium and large clients remain responsible for the full off-payroll process under Chapter 10.

The working relationship can still be inside IR35, even where the client is small. So, does IR35 apply to small companies? Yes. So avoid describing a small business as “exempt from IR35” without qualification. The more accurate framing is that the off-payroll working responsibilities do not generally transfer to a qualifying small client.

Using the wrong financial figures or assessment period

Let’s review the two-out-of-three test discussed above wherein a company must meet at least two of these three conditions, not just one:

1. Turnover
2. Balance sheet total
3. Average employee number

These figures must come from the correct prior financial year, not current trading performance or an informal estimate. The thresholds changed on 6 April 2026, but most established businesses will only see the practical effect from the 2027-28 tax year.

Additionally, accounts, group arrangements, and any recent change in company size all need careful review. A company cannot decide it’s small for IR35 purposes simply because turnover sits below £15 million if it fails the other tests.

Don’t rely on a sales forecast, a single turnover figure, or an outdated company-size classification. Document the financial year, the figures used, and the reasoning behind your conclusion.

Letting actual working practices contradict the contract

A well-drafted contract cannot override what’s really happening with the engagement. Do watch out for these risk indicators:

• A contractor managed like an employee
• Fixed working hours and direct supervision
• No meaningful right of substitution
• Deep integration into internal teams, systems, and organisation culture
• An exclusive and long-running engagement with no real business independence

These factors matter most where the client is medium or large, but they are still relevant to the contractor’s own Chapter 8 assessment even in small-client engagements. 

Hiring managers, procurement, and HR should understand the contractor model they intend to run, and avoid drifting into employee-like practices unintentionally. See our guide to the risks and penalties of employee misclassification for what’s at stake.

A simple decision path for IR35 company size

1. Identify the exact legal entity engaging the contractor.
2. Run the two-out-of-three test against the correct prior financial year’s accounts.
3. Check group and connected-company rules if the entity sits within a wider corporate structure.
4. Apply the two-year rule to confirm whether your classification has actually changed.
5. Confirm who is responsible for the IR35 assessment based on the result: your organisation under Chapter 10, or the contractor’s intermediary under Chapter 8.
6. Document and communicate the conclusion to agencies and contractors before the engagement starts.

Staying compliant under the new thresholds

The April 2026 threshold changes reduce the IR35 compliance burden for a significant number of UK businesses, but they do not eliminate it. They also introduce new complexities around timing, communication and umbrella arrangements that organisations need to manage carefully.

Getting your IR35 company size assessment right, and documenting how you reached it, matters just as much under the new thresholds as the old ones.

For a broader look at UK contractor compliance beyond IR35, see our guide to contractor management in the UK. 

If you’re not sure how these changes apply to your business, or you want a second opinion on your current contractor-compliance process, CXC Comply can help you work through classification, documentation and supply-chain due diligence. 

Get in touch to talk through where your organisation stands.

Frequently asked questions about IR35 changes 2026

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