HMRC has confirmed that the upcoming increase in company size thresholds will apply to the ‘off-payroll working rules’ (IR35).
IR35 regulations are designed to ensure individuals working through their own limited company or partnership, pay broadly the same tax and national insurance as individuals who are directly employed.
From 6 April 2026 or 6 April 2027 (depending on the entities year end date), more end-client companies will qualify as “small” and fall outside of the scope of the IR35 regime.
What it means to be IR35-exempt
A company that is IR35-exempt does not have to apply the rules, when engaging contractors who operate through their own limited companies.
This means the client is not required to decide the contractor’s IR35 status or make tax deductions at source. This responsibility will revert to the contractor, as long as the services supplied are outside of the public sector.
Meeting the company size criteria
The new clarification follows changes introduced in April 2025, under the Companies Act 2006. The changes are as follows:
- Annual turnover: The turnover threshold for a small company will rise from £10.2 million to £15 million.
- Balance sheet total: The balance sheet total will rise from £5.1 million to £7.5 million.
- Number of employees: The employee threshold will remain at an average of no more than 50 employees per month.
[NB: meeting any two of the above criteria will classify a company as small]
The updated thresholds are believed to better reflect inflation and business growth.
These changes mean that around 14,000 companies currently defined as medium-sized will be reclassified as small.
How to prepare
End-clients should confirm and communicate their company size status to agencies and contractors well in advance, because IR35 responsibilities depend entirely on that status.
Communicating company size early helps all parties to:
- Apply the correct IR35 procedure from the outset
- Avoid disputes over who is responsible for deductions and liabilities
- Ensure consistency across the supply chain
- Reduce the risk of retrospective HMRC challenges
Misunderstandings about a company’s size could lead to incorrect tax treatment, non-compliance and potential financial penalties.
The news is likely to be welcomed by contractors too, as it will potentially allow more of them to operate outside of IR35.
