IR35 shake-up hands small firms a surprise tax break

A major change to IR35 has slipped under the radar — but it could reshape how thousands of businesses hire. From April, many firms once classed as “medium” are now officially “small”, freeing them from the burden of policing contractor tax status. For business owners, it’s a welcome easing of red tape and risk. For contractors, it’s a different story. The responsibility — and the danger of getting it wrong — shifts firmly back onto their shoulders, with HMRC watching closely.

IR35, also called the off‑payroll working rules, is the tax framework that decides whether a contractor working through a personal service company (PSC) is really:

• Self‑employed for tax purposes, or

• A deemed employee who should pay PAYE and National Insurance

Since 2021, medium and large companies have been responsible for deciding a contractor’s IR35 status and issuing a Status Determination Statement (SDS). Small companies were exempt. Contractors determined their own status.

From 6 April 2026, the definition of a “small company” has become much wider. This means thousands of companies will no longer have to apply IR35 rules.

A company will be classed as small for IR35 purposes if it meets two of the following:

• Turnover ≤ £15m (up from £10.2m)

• Balance sheet ≤ £7.5m (up from £5.1m)

• ≤ 50 employees (unchanged)

Photo by Sebastian Herrmann on Unsplash

In practice:

• Many companies currently classed as medium will now be reclassified as small.

• These companies will no longer need to issue SDSs or operate PAYE for contractors.

• Responsibility for IR35 decisions shifts back to the contractor’s Personal Service Company.

Around 14,000 companies are expected to move from medium to small as a result.

For small and micro businesses this is good news because:

• You no longer have to assess IR35 status and carry the risk of not complying with the law.

• You avoid the risk of HMRC transferring the liability for tax to you if they decide you’ve been incorrect in your assessment of IR35 status.

• You can focus on hiring the right talent without worrying about complex tax rules.

For contractors it’s more complicated:

• Contractors take back responsibility for determining their own IR35 status in those cases.

• They must ensure their contracts and working practices genuinely reflect self‑employment.

• Some may need to adjust their rates to reflect the shift in risk.

Some rules stay the same:

• The employment status tests (control, substitution, mutuality of obligation)

• The 50‑employee threshold

• Public sector bodies must still apply IR35

• Contractors still need to use the original IR35 rules (Chapter 8 ITEPA 2003) when working with small companies

From now on:

• More companies qualify as “small”

• IR35 responsibility shifts back to contractors

• Small businesses are relieved of the regulatory burden

• Contractors must be more vigilant

This is one of the few pieces of regulatory news that genuinely reduces admin for small and micro businesses. Let’s hope it doesn’t add to the confusion for small contractors who aren’t aware of the changes. Most companies will want to check out the rules with their accountants or legal advisers to make sure which side of the line they sit on.