New IR35 off-payroll thresholds to apply from 6 April 2026

Under current off-payroll working rules, the client or end-user receiving personal services from a worker through a third-party intermediary must determine the worker's employment status.

If the client or end-user determines the worker is a deemed employee, they must operate PAYE, National Insurance contributions and App Levy where appropriate.

These rules apply to businesses in the public sector or any business in the private sector classed as medium or large according to the criteria set out in the Companies Act 2006.

Those private sector businesses classed as small do not need to consider the off-payroll working rules, and any limited contractors they engage for personal services must consider their own IR35 status as per the original Chapter 8 of the legislation found within ITEPA 2003.

The definition of what is a ‘small business’ is taken from the Companies Act 2006 and will apply to limited companies, LLPs, unregistered companies and overseas companies.

A business will be small if it satisfies two or more of the following requirements

• It has an annual turnover not exceeding £10.2m.
• It has a balance sheet total of not more than £5.1m.
• It had an average of 50 employees or below, for the company’s financial year.

For accounting periods beginning on or after 1 April 2025, the thresholds above are increasing to

• It has an annual turnover not exceeding £15m.
• It has a balance sheet total not more than £7.5m.
• The employee threshold of 50 workers will remain.

Determining whether you apply for the small business IR35 exemption

To determine whether the small business exemption applies to a tax year, these requirements are applied to two consecutive financial years ending before the tax year you are testing; the latest financial year where the filing date for the accounts ends before the beginning of the tax year and the financial year before that one.

Where two or more of these requirements are met for two consecutive financial years, the business remains small and responsibility for applying the IR35 rules remains with the intermediary/PSC.

Examples based on differing year-ends

What is the impact of the changes?

As a result of the changes, several businesses or end-users who have been considered ‘medium-sized’ will now be re-categorised as ‘small’. This means that responsibility for determining IR35 status will sit with the contractor’s PSC, rather than the client or end-user, under Chapter 8 ITEPA 2003.

Additionally, the changes will mean that a new population of third-party intermediaries (PSCs) will be responsible for their own IR35 compliance.

It is important for businesses to check who they are engaging with – if it is an individual or sole trader unincorporated business, the paying company engaging the services must ensure that they have assessed their employment status for tax purposes.

Group structures and Joint Ventures (JVs)

Where a business is in a group structure or part of a JV, as determined by the IR35 rules, the small business test must be applied to the group as a whole and will apply to the aggregate turnover and balance sheet total of all connected entities or persons. This is to avoid medium or large-sized companies setting up smaller subsidiary companies to engage third party intermediaries (PSCs) with the aim of avoiding the requirement to apply the IR35 legislation.

Key takeaways 

1. Businesses/end-users engaging workers should consider whether the small business exemption applies to them, under current and incoming legislation.

2. The group structure of a business should be fully understood to ensure that all relevant entities/persons are included when calculating if the small business test conditions have been met.

3. If a business is exempt because it qualifies as small, it should ensure that the intermediaries it uses are aware of this, so they apply the IR35 rules themselves, especially as the intermediaries have the right to request confirmation whether a business qualifies as small. This is also relevant for CCO compliance.

4. Where a business ceases to be small, the intermediary/PSC must be made aware that responsibility for applying IR35 will pass from them to the business/end-user.

5. Lastly, once the qualifying criteria have been understood and considered, the complexity around assessing status needs to be put into motion.

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